Those selling dollars may have gone too far
Aug 22 (Reuters) -There is a significant chance of a dollar rally to correct a stretched drop that has been fuelled by traders selling short before key levels are broken.
Those selling dollars hope that a series of U.S. interest rate cuts starting in September drive the dollar lower, and are preparing for an easing cycle involving the U.S. central Bank cutting at each of its next six meetings, with one cut by 50 basis points.
Those expectations seem unrealistic and have led to a drop in the dollar index that may also have gone too far.
The index touched a 2024 low on Wednesday at 100.92, far below the 102.05 base of the 20-week Bollinger Bands but short of December's 100.61 low and 200-WMA at 100.30. The drop is severely stretched before big levels have been tested which should worry those selling at these low levels.
To meet their expectations, the cycle of cuts must lead the U.S. interest to its perceived base around 3-3.5% within one year and the Federal Reserve must see cause to slash by 50 basis points at some stage.
The economy has slowed not collapsed, and record highs for U.S. stocks reflect boom not bust, while inflation is above target, not below it.
The dollar is above key levels, but far below a point that should result in a rebound.
For more click on FXBUZ
U.S. int rate outlook https://tmsnrt.rs/4dOoqWu
USD index weekly https://tmsnrt.rs/4dxg6uq
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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