Speculators give in to the dollar’s strength

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The US dollar wavered near a four-month high on Monday after Turkey’s President Tayyip Erdogan surprised investors over the weekend. He replaced the central bank governor, a supporter of restrictive monetary policies, which caused a significant shock in world currency markets.

The lira plummets 15%, approaching its all-time low, and sovereign bond yields soar after Turkey’s decision sparked fears of a reversal of recent rate hikes, undermining the bank’s credibility.

Turkey’s decision comes in a context in which investors reinforce their optimism about the short-term outlook for the dollar following the rise in US Treasury yields, increasing the safe-haven appeal of the US currency.

Marshall Gittler, head of investment analysis at BDSwiss, said that speculators have finally given in to the dollar’s strength.

Yields on the benchmark 10-year US Treasury have risen for seven consecutive weeks, triggering a reduction in short dollar positions against major currencies.

According to the latest positioning data, traders cut their long euro positions to their lowest levels since June 2020. Meanwhile, net positions against the Japanese yen turned positive for the first time in more than a year.

JP Morgan increased its long US dollar position in its foreign exchange portfolio

Against a basket of its rival currencies, the dollar was virtually flat at 92.022.

Fears that events in Turkey would spill over into other currencies supported the dollar.

Masafumi Yamamoto, a chief currency strategist at Mizuho Securities in Tokyo, said that other emerging markets are not in the same situation as Turkey, but there could still be some contagion.

The Turkish lira stood at 7.9600 per dollar, which is an almost 10% drop compared to Friday’s close. At one point, the lira plunged 14.9% to 8.4850, which is close to a record low of 8.5800. The euro fell slightly to $1.1892. 

Declining risk appetite weighed on the Australian dollar, which dropped 0.3% to $0.7724. Furthermore, the New Zealand dollar was down 0.1% to $0.7158.

Delayed stimulus payments – short-term challenges to the US

On Monday, Jerome Powell, the Fed chairman, stated that the Covid-19 pandemic exposed weaknesses in the global payment system. One of them was the delays in stimulus check deliveries to Americans.

Powell stated that the country’s regular payment system gets things there in a few days. However, this time it was challenged to deliver massive, hundreds of millions of payments quickly. 

It took the federal government around two weeks to distribute the first round of $1,200 cash payments in April. January’s second round of checks, worth $600, took about one week. 

The severity of the crisis caused by the coronavirus forced an unprecedented shutdown of the US economy. It caused the unemployment ranks to expand in days. According to Powell, timing is essential.

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