Dollar set for the worst month in a decade

By Giles Coghlan, Chief Currency Analyst at HYCM

According to Bloomberg data from the Commodity Futures Trading Commission (CFTC), the US dollar is now heading to register its weakest July since 2010. The CFTC shows that asset managers have added to net long positions on the yen, the Canadian dollar, and the euro. This is as investors exit the dollar and move into other currencies. These currency moves have further increased weakness in the Bloomberg Dollar Spot Index seeing it fall a large 3.4% this month alone. This is why the Bloomberg Dollar Index is on track for its worst July since 2010.

The reasons for dollar weakness

So, what are the underlying reasons for dollar weakness? There are a number of key reasons for dollar weakness:

- The further deterioration in the relationship between the US and China.
- The expanding COVID-19 case count in the US is showing that the US economy is likely to be slow coming out of lockdown.
- The general uncertainties around a November presidential election are keeping the USD sold.
- Increasing expectations that the Fed will need to cut policy rates further with the potential for yield curve control on the horizon.

What to expect from the Fed tonight?

The Fed is expected to signal more accommodation tonight. So, if there is any talk of yield curve control or negative interest rates expect that to add further weakness to the USD. However, that seems unlikely as the Fed will most likely just stay in a wait and see mode. The Dollar Index has broken through a key monthly trend line and a clean break opens the way up for more sellers. The key monthly support sits below in the 90.00 region which is a target for sellers.

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