Dollar’s longer downtrend looks unlikely

The US Dollar Index is close to testing the recent intraday low from 15th November at 105.34. However, economists suggest that the US dollar’s selloff pressure would not go further in the near future.

According to FOMC minutes, there is no room for providing conviction for higher terminal rate. Wednesday’s FOMC minutes even failed to provide enough conviction to the belief expressed by Fed Chair Powell that the terminal rate for the fed funds would need to be higher than the September media dot implied (4.625%).

The US dollar will remain vulnerable to speculation of an end to the tightening cycle. The Treasury 2s10s curve continues to invert and is indicative of a growing belief that inflation risks are receding but with the Fed not in a position to pause.

But the escalation of covid infections to record high levels in China and recession in Europe also mean there are limits to the scale of US dollar selling that should mean this long Dollar squeeze does not have too much further to go.