USD: Driver of DXY rally switches from yield spreads to risk sentiment – MUFG

Analysts at MUFG Bank, expect the US dollar to remain bid in near-term but concerns over global growth and a tighter Federal Reserve policy should ease later this year.  They mentioned the US dollar Index (DXY) rally is approaching key resistance levels near the YTD high at 93.43; they see that a sharp unwind of USD shorts has reinforced the upward momentum but should be less important going forward.

Key Quotes:

“The USD has continued its advance this month helping to lift the dollar index back to within touching distance of the year to date high of 93.437 from the end of March. After hitting a low on 25th May, the dollar index has strengthened by around 3.5% and is back trading at levels that were in place prior to last year’s US Presidential election between 92.000 and 94.000. The USD’s upward momentum has been reinforced by a sharp reduction in short positions over the past month amongst Asset Manager/Institutional and Leveraged funds that have fallen to their lowest levels in over year.”

“First stage of USD rally was driven by hawkish Fed policy update as short-term US yields moved higher.”

“Global growth concerns have taken over more recently as main driver for stronger USD. Upcoming FOMC meeting could see market focus shift back to Fed policy and plans for QE taper.”

“We expect the USD to stay bid over the summer as support from global growth and Fed policy tightening concerns remain in focus. However, we expect both concerns to ease later this year resulting in a reversal of USD strength.”