Dollar bounces after worst month of decade

LONDON, Aug. 3 (Reuters) – The dollar rebounded against a basket of rivals on Monday, as a pullback from overcrowded shorts combined with demand for safe-haven gave the currency some breathing space after its worst monthly performance in a decade.

FILE PHOTO: Four thousand US dollars are counted by a banker counting currency at a bank in Westminster, Colorado, November 3, 2009. REUTERS / Rick Wilking / File Photo / File Photo

The dollar = USD index, which measures the greenback against a basket of major currencies, lost more than 4% in July, its worst month since September 2010. It is down 10% from its March high.

Analysts are reducing the appeal of safe havens as financial markets recover, market expectations for further easing of US monetary policy and the lack of agreement among US lawmakers on further fiscal stimulus. Falling US bond yields were also cited as a factor.

Speculators’ net shorts on the US dollar reached their highest level since August 2011 at $ 24.27 billion, according to Reuters calculations and data from the US Commodity Futures Trading Commission.

A partial pullback from this overcrowded short position could be the reason for the dollar’s rally over the past two days, analysts said, also citing rising geopolitical tensions between the United States and China.

“There’s usually something that drives global markets up in August, and this year might not be any different given the growing list of market risks,” said Viraj Patel, global FX and macro strategist at Arkera.

“Given the rally in risky assets in recent months, this growing geopolitical threat could lead to a recovery in positions and a potential reversal of recent trends that would help the dollar recoup its recent losses.”

The dollar index rose 0.2% = USD, with the greenback being higher against all currencies in the basket on which the index is based. JPY = CHF = SEK = EUR = GBP = CAD =

“The factors that caused DXY (the dollar index) to fall 10% from its March high are still in place and we expect a ‘sell the rally’ mentality to develop through August,” ING strategists said in a note to clients.

“We will also be focusing on (US) Congress, where the $ 600 per month UI supplement has now expired and the parties are fighting over the design of the Phase IV stimulus package. Delays can disrupt asset markets, which usually tend to struggle a bit more in August.

TRANSATLANTIC GAP

Investors have reason to worry about the U.S. outlook as policymakers struggle to strike a deal to pump more money into the world’s largest economy.

A growing budget deficit in the United States to finance the stimulus has prompted Fitch Ratings to revise its outlook on the United States’ triple A rating from stable to negative.

Although there was no immediate market reaction to the downgrade, the European Union was improved by Standard and Poor’s decision to raise its block rating outlook from positive to stable.

Sentiment towards the euro improved after EU leaders agreed to a € 750 billion ($ 882 billion) economic stimulus fund last month while still jointly indebted as part of an event of regional cooperation.

The single currency was trading at $ 1.1763 EUR = EBS in London morning trading, after a two-year high of $ 1.1908 reached last week.

Reporting by Ritvik Carvalho; Edited by David Goodman

Our Standards: Thomson Reuters Trust Principles.

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