Forex Traders Cover US Dollar Shorts Ahead of Critical G7 Meeting, Dollar Rally to Co

The US dollar approached record-lows against the Euro and fresh multi-decade depths against the Canadian dollar, as overwhelmingly bearish sentiment led forex traders to sell the downtrodden greenback. A later Dow Jones Industrial Average tumble forced a pullback in currency markets, however, as signs of risk aversion sparked a short-term dollar bounce.

The Euro rallied for most of overnight Asia and London trading, falling just 40 points short of all-time highs against its US counterpart. The British Pound likewise saw strong bids, remaining near intraday peaks of $2.0433 through time of writing. The Canadian dollar was among the few currencies to fall against the greenback on a daily basis, showing signs of exhaustion following its remarkable longer-term rallies.
Bullish surprises in US economic data took a backseat to broader financial market activity, as strong declines in equity markets forced a similar forex carry trade pullback. High-yielding currencies such as the Australian and New Zealand dollars felt the brunt of renewed risk aversion, while the sharply oversold US dollar benefited from a modest drop in open interest in leveraged forex trading. Such developments make it difficult to determine whether the dollar rebound will continue through later trade, but the trend clearly remains towards a lower greenback. In fact, a prominent International Monetary Fund official claimed that the currency remains overvalued at current levels—giving additional justification for taking a bearish stance on the buck.
Official commentary on overall currency trends will likely dominate price action in the days ahead, as markets grow wary of the coming weekend’s G7 meeting in Washington, DC. G7 communiqués have often forced significant volatility in currencies such as the Japanese Yen and the US dollar, and the past statement seen in February was no exception. Risk-averse forex traders covered Japanese Yen short positions ahead of the widely anticipated summit, fearing that the Group of Seven Finance Ministers would advocate a strengthening of the Yen to correct global imbalances. Yet inaction from the G7 text led to an immediate JPY tumble, as traders grew more confident on the future of carry trade gains. Whether or not the final statements from the meeting make specific reference to the downtrodden Japanese Yen and the US dollar remains the critical question through short term trade. In the meantime, markets are likely to trade off of fairly significant event risk across global economies. (To see a detailed list of coming events, be sure to see the DailyFX Calendar)
Dow Jones Industrial Average tumbles stole forex market headlines, with the key equity index off 136 points to 13,957 at time of writing. The other two major stock barometers were similarly weak, as the S&P 500 and the NASDAQ Composite shed a similar 0.9 percent to 1,547 and 2,780, respectively.
US Government Treasury Bonds were significantly less affected by the nascent signs of risk aversion, remaining largely flat despite Dow tumbles. The key 2-Year Note yield fell a single basis point to 4.23 percent, while the 10-year yield remained at 4.68 percent. The divergence in stock markets and other key risk-linked assets suggests that this risk episode may be short-lived, as there are few similarities to broader market meltdowns seen in August and March.
Written by David Rodríguez, Currency Analyst for