Dollar rallies after weakest month in a decade

London

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 weakest monthly performance in a decade.

The dollar index, which measures the greenback against a basket of leading currencies, lost more than 4 per cent in July, its biggest monthly drop since September 2010. It is down 10 per cent 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 US monetary policy, and a lack of agreement among US lawmakers on further fiscal stimulus. Falling US bond yields have also been cited as a factor.

"The factors that have seen DXY (the dollar index) fall 10 per cent 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. Speculators' net shorts on the US dollar have soared to their highest since August 2011 at US$24.27 billion, Reuters calculations and US 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.

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The dollar index was up almost half a per cent by midday in London, with the greenback higher against all currencies in the basket on which the index is based.

Against the Japanese yen, the dollar gained 0.1 per cent to push past the 106 yen per dollar mark.

On Friday, the dollar posted its biggest daily rise against the Japanese currency since March, halting a rally in the yen which saw it gain 3 per cent in July.

Japanese Finance Minister Taro Aso described the yen's recent rise as "rapid" on Friday, signalling concern that a strong currency could do more damage to an export-led economy already in recession.

Investors have reasons to worry about the US outlook as policymakers struggle to clinch a deal to pump more money into the world's largest economy. A growing US fiscal deficit to finance the stimulus prompted Fitch Ratings to revise its outlook on the US' 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 (S$1.2 trillion) economic recovery fund while also taking on debt jointly in a show of regional cooperation.

The single currency traded at US$1.1763 in morning trade in London, off a two-year high of US$1.1908 hit last week. REUTERS