The melting of the dollar reversed by top US economic officials

23 September, 2020

The two US economic policymakers, the Fed Governor and Treasury Secretary are supporting interest in US assets, strengthening both the dollar and the equity market yesterday.

Mnuchin and Powell noted during the Congressional hearing that the US economy is recovering better than expected, but still needs support. In particular, they talk about the need for more help for small business, but the discussion lacks details.

Separately, Evans, a voting member of the FOMC next year, made relatively hawkish comments. He noted that the Fed could start raising rates before the inflation averages 2%. These words have somewhat dampened medium-term inflation expectations and benefited the dollar.

The Fed’s mix of hopes for new stimulus and a less relaxed approach than expected has returned investor interest in US assets. Moreover, it happened at a critical moment. The dollar index emerged from the depths, where it consolidated from the end of July.

The dollar index strengthened above the 50-day average, and EURUSD dropped below this line. In the morning the single currency was down to 1.1675 dollars, the lowest level in eight weeks, thus confirming the break-up of the upward trend that took place in May. The short squeeze further amplified the more of the dollar.

The development of a corrective rollback on the dollar may take EURUSD relatively quickly to 1.1640. If the dollar bulls do not retreat here, the euro could test the area 1.1500 before the end of October. Apart from the fact that this is a psychologically important round level, there is a 61.8% correction area from the March-September upward move and the peak in March.

However, it is interesting to note that the steady growth of the dollar is weakly combined with a steady rise in the US stock indices. This, in turn, entices investors from stocks and commodities in favour of bonds whose real yields are increasing.

Although periods of simultaneous growth of the dollar and securities are not uncommon recently, they are never sustainable. Based on the fact that the dollar has stopped not only its decline but also confirmed the reversal signal for growth, stocks may not perform smoothly in the coming days.

Additionally, we should not forget that the major US indices remain below their 50-day average, sending a short-term bearish signal despite the rebound in the last 24 hours.

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