The U.S. Dollar Index (DXY) has declined by nearly 0.64% over the past five sessions as the latest non-farm payroll data came in softer than expected. The soft print has raised optimism around a potential rate cut. And yet, the current global geopolitical tensions, coupled with the developments in the currency markets, point to a gradual buildup of positive momentum in the U.S. dollar.
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U.S. Policy Talk
The latest nonfarm payrolls (NFP) report indicated an addition of 175,000 jobs in April. The Street had expected an addition of nearly 243,000 jobs. Over the past few days, the NFP print has substantially quashed fears of a further hike in rates while raising optimism for a rate cut from the U.S. Fed. However, today, Neel Kashkari, the President of the Minneapolis Fed, indicated that more work may be needed to cool down inflation and that the current monetary policy may not be restrictive enough.
Yen’s Slide
Meanwhile, the Japanese Yen (FX:USD-JPY) is on weak footing after Treasury Secretary Janet Yellen reiterated expectations that Japan’s currency interventions are expected to be a rare occurrence. Last week, the Bank of Japan (BOJ) likely stepped in to stem a fall in the Yen, which is hovering at multi-decade lows. The Yen is largely expected to move closer to the 160 level against the USD this year.
Rate Path in Europe
While the interest rate path in the U.S. is unclear, the European Central Bank (ECB) looks set to slash rates as inflation in the eurozone eases. Meanwhile, the stalled Israel-Hamas negotiations and Israel’s push into Rafah could possibly lead to heightened geopolitical risks over the coming days. Any flare-up in tensions in the region could boost safe-haven demand for the dollar.
Is the DXY Expected to Rise or Fall?
This push has coincided with large currency speculators lowering their net short positions in USD, according to the Commodity Futures Trading Commission (CFTC). The scaling-back of short positions indicates caution and potential strength in the USD over the coming periods. Consequently, the DXY could display strength in the short-term.
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