The dollar: has the trend been broken?

• The fall in the USD index could mark the beginning of the end.
• Rumours of currency interventions sent USDJPY tumbling.

The US dollar plummeted to a two-week low amid disappointing labour market figures. Non-farm payrolls rose by 57,000 in June and were revised downwards by 74,000 for April and May. The fall in the unemployment rate to 4.2% was due to a reduction in the labour force rather than an acceleration in hiring.

Against the backdrop of these figures, the probability of a rate rise in July fell from 30% to 20% in the markets; the probability of a rise by September fell from 64% to 53%; and the probability of a rise by the end of the year fell from 83% to 78%. This put pressure on the dollar. Earlier, speculators had increased their net long positions in the US currency to a one-and-a-half-year high, making this trade heavily concentrated. Profit-taking became the catalyst for the rise in EURUSD.

According to Credit Agricole, the US dollar appears overbought and overvalued. The Fed may, in fact, not be as ‘hawkish’ as the markets believe. Eurizon SLJ Capital maintains that investors have already squeezed everything they can out of the USD index rally. The positive sentiment has been fully priced in; it is now time to take profits.

TD Securities argues that as global GDP accelerates and risk premiums narrow, the interest rate differential between the US and the rest of the world will narrow, leading to a weakening of the greenback in the second half of the year. The stabilisation of the international situation following turmoil caused by tariffs and the conflict in the Middle East could also trigger a depreciation of the dollar’s exchange rate.

Meanwhile, the sharpest fall in USDJPY since Japan’s currency interventions in April and May has prompted speculation about whether the authorities have resumed such practices. Was there intervention in the forex market, or did speculators’ fears prompt them to close out the short positions of their own accord?

A Reuters report and a speech by Atsushi Mimura triggered the sell-off in USDJPY. The news agency claims that the government has adopted a new tactic: rather than giving a warning of currency interventions, as it did at the end of April, it will now rely on the element of surprise. The chief currency official, the Vice Minister of Finance for International Affairs, stated that the previous intervention was justified, and that the US does not object to, but rather supports, such actions.

The FxPro Analyst Team