Us Dollar Forecast: Where To After GameStop Short Squeeze Rattled Markets?

Dollar, Money, Cash Money, Business, Currency, Finances

US DOLLAR FUNDAMENTAL FORECAST: NEUTRAL

  • US Dollar consolidation continued as market volatility unfolded
  • Treasury yields may have been offsetting impact of rising stocks
  • Fundamental risks: fiscal stimulus, jobs report, short-squeezing

Amid persistent declines in the US Dollar for the better part of the past 10 months, last week served as a reminder to investors of the kind of situation that tends to bode well for the Greenback. When volatility strikes and investors prioritize safety, the common choice of haven asset are Treasuries. Last week, the VIX ‘fear gauge’ temporarily spiked by the most in almost 3 years over the course of 24 hours.

This dynamic offered a boost to the US Dollar, but follow-through seemed lacking. What has been more interesting is the ‘bottoming’ in the Greenback since this year began. Well, at least relative to the broader trend since March 2020. This is despite gains in the Dow JonesS&P 500 and tech-heavy Nasdaq Composite. Part of the leveling out in USD can be explained by Treasury yields, which remain important to watch ahead.

Expectations of larger-than-expected US fiscal stimulus sent longer-dated Treasury yields spiking earlier this month – see chart below. Rising rates can bode well for a currency, or at the very least slow its descent. That is why the Greenback may have been holding its ground despite gains in equities. But, there are warning signs ahead that may end up benefiting the US Dollar as it enters a consolidative phase.

President Joe Biden’s US$1.9 trillion Covid package may have to wait until at least the middle of March and its size is in question. That leaves the door open to disappointment in the near term. Meanwhile, surging retail investor trading in heavily-shorted stocks (such as GameStop and AMC) has been a red flag for hedge funds. According to Bloomberg, the latter are reducing equity exposure at the fastest pace since 2014.

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