The US dollar saw its largest gain against the euro in over two years, as overextended dollar-bearish sentiment allowed for a substantial relief rally to finish the week of currency trading. Forex speculators sparked the initial dollar rebound through the early morning European trading session, while a later US Consumer Price Index report boosted domestic Treasury bond yields and the attractiveness of the greenback. Indeed, the US dollar is on pace to gain for the third consecutive week on a trade-weighted basis—a feat almost unimaginable just a month ago.
Tired US dollar bears finally relented on their overextended greenback short positions, allowing the buck to surge higher on pure currency trading flows. As we argued in this past week’s DailyFX Commitment of Traders report, extremely lopsided trader sentiment threatened to force a substantive dollar bounce. Recent price action suggests that we may in fact see a further dollar recovery before a continued downtrend, and it will be important to watch short-term shifts in USD sentiment to gauge the likelihood of a turn.
Fundamental data has likewise boosted the currency’s prospects, with higher than expected Consumer Price Index inflation figures raising forecasts for domestic interest rates. Rising US Treasury bond yields and a continued pullback in expectations for Federal Reserve interest rate cuts increased the attractiveness of the greenback, and any further gain in yields could only drive continued US dollar gains.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]
To discuss the US dollar and other major currencies with DailyFX analysts, be sure to visit the DailyFX.com Currency Trading Forum.