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FOREX-Dollar rallies after worst month in decade
Published at 03/08/2020 at 09:14

* Graphic: World FX rates in 2020

By Ritvik Carvalho

LONDON, August 3 (Reuters) - The dollar rallied against a basket of rivals on Monday as a squeezing out of crowded short positions combined with safe-haven demand gave the currency some respite after its worst monthly performance in a decade.

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

Analysts put the slide down to waning safe-haven appeal as financial markets recover, market expectations for further easing of U.S. monetary policy and a lack of agreement among U.S. lawmakers on further fiscal stimulus. Falling U.S. bond yields have also been cited as a factor.

Speculators' net shorts on the U.S. dollar have soared to their highest since August 2011 at $24.27 billion, Reuters calculations and U.S. Commodity Futures Trading Commission data show.

A partial squeezing out of that crowded short position may be the reason for the dollar's rally in the past couple of days, analysts said, also citing rising geopolitical tensions between the United States and China.

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

"Given the way that risky assets have rallied in recent months, this rising geopolitical threat could lead to a squaring off in positions and potential reversal of recent trends that would help the dollar recoup its recent losses."

The dollar index was up 0.2% , with the greenback higher against all currencies in the basket on which the index is based.

"The factors that have seen DXY (the dollar index) fall 10% from its spike high in March 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'll also be focusing on (the U.S.) Congress, where the $600 per month unemployment benefit boost has now expired and the parties are wrangling over the design of the Phase IV stimulus package. Delays here may upset asset markets, which typically tend to struggle a little more in August."

TRANSATLANTIC GAP

Investors have reasons to worry about the U.S. outlook as policymakers struggle to clinch a deal to pump more money into the world's largest economy.

A growing U.S. fiscal deficit to finance the stimulus prompted Fitch Ratings to revise its outlook on the United States' triple-A rating to negative from stable.

While there has been no immediate market reaction to the downgrade, the European Union gained a lift from Standard and Poor's decision to upgrade its rating outlook on the bloc to positive from stable.

Sentiment on the euro has improved after EU leaders agreed last month to a 750 billion euro ($882 billion) economic recovery fund while also taking on debt jointly in a show of regional cooperation.

The single currency traded at $1.1763 in morning trade in London, off a two-year high of $1.1908 hit last week. ($1 = 0.8500 euros)

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(Reporting by Ritvik Carvalho Editing by David Goodman)

((Ritvik.Carvalho@thomsonreuters.com; +44 2075429406; Reuters Messaging: ritvik.carvalho.thomsonreuters@reuters.net))