US Dollar Weakens but Fundamentals Point to Recovery Soon - How to Trade It
The US dollar staged a bit of a sell-off overnight, with commodity-linked currencies showing strong performance.
This was driven by an already positive risk sentiment, which received an additional boost from Nvidia's (NASDAQ:NVDA) earnings surpassing forecasts and its optimistic outlook, sending the Nasdaq 100 futures soaring towards new record levels and buoying Asian markets.
Subsequently, in early European trading, the greenback continued to weaken as the German DAX index reached fresh all-time highs. FX pairs like EUR/USD and GBP/USD gained momentum, fueled by better-than-anticipated PMI data from France.
However, later-released German PMI figures fell short of expectations, with manufacturing activity dropping from 45.5 to 42.3. This helped to keep the EUR/USD below the 1.09 mark.
The US dollar may be weak now, but the bears will find it increasingly difficult to justify a big move lower. If anything, the risks are now skewed to the upside for the greenback.
In the absence of significant deterioration in incoming US data, it's challenging to adopt a bearish stance on the dollar. Nonetheless, it remains crucial to select the appropriate currency pair when trading the dollar, regardless of whether one is bullish or bearish.
Those taking a bearish view on the greenback would be wise to consider currencies with relatively high interest rates, such as the NZD or GBP. Conversely, currencies like the CHF and especially the JPY, which remains the standout funding currency with negative interest rates in Japan, are more suited for shorting against the dollar.
At least, this has been the prevailing trend thus far in 2024 anyway, with the JPY down approximately 6% against the dollar year-to-date. I don't anticipate a
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