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Is The U.S. Dollar Weakness Short-Lived? Analysts Weigh In

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Is The U.S. Dollar Weakness Short-Lived? Analysts Weigh In

(Kitco News) - The U.S. Dollar Index plunged to three-year lows Monday, giving a boost to the precious metals sector, but some analysts warn that the weakness could be short-lived.

The Dollar Index was last at 90.43, down 0.52% on the day, marking the weakest level since January 2015, according to Kitco.com.

Analysts are keeping a close eye on the possibility of the U.S. government shutdown this week if a budget deal is not reached by Friday, which could have a major impact on the U.S. dollar.

“The USD remains unloved with DXY trading to a 3-year low,” said Sue Trinh, head of Asia FX Strategy at RBC Capital Markets. “It will be a relatively quieter start to the week with the U.S. marking Martin Luther King Day but the threat of a US government shutdown once again looms with funding expiring on Friday.”

The key question to ask is whether or not greenback’s move downward is driven by fundamentals, according to analysts.

“The weakness in the dollar is not justified by fundamentals. It's a little bit weird considering the divergence in monetary policy should play in favor of a stronger dollar,” Reuters quoted Capital Economics analyst Simona Gambarini as saying.

Chief market strategist at FXTM, Hussein Sayed, also said that it were “external factors” impacting the dollar.

“The U.S. data released over the last week certainly doesn’t justify a dollar selloff. U.S. core consumer prices recorded their largest increase in 11 months in December, rising 0.3%. Retail sales for December rose 0.4%,” Sayed wrote in a note on Monday. “The expectations for an interest rate hike in March [were] above 72% from just a 50% chance last month. This clearly suggests that internal data did not inspire the dollar selloff, but rather, external developments played a role.”

But, some forex experts believe the greenback has a bit more room to fall before recovering, stating that traders have been shorting the dollar.

“An upside surprise in CPI offered a minor reprieve for the ailing greenback, and the pain persists at the start of a new week; our positioning indicators show the market is short the buck, but it has more room to fall before coming stretched,” Mark McCormick, North American head of FX Strategy, said in a note on Monday. “While inflation could start to perk up this year, it is not a given the Fed will react to it. That could leave US real rates lower, which would bury the [U.S. dollar].”

In the meantime, the weaker U.S. dollar has been working in favor of gold prices, which pushed up to 4-month highs on Monday. 

“Gold continues to move higher as momentum has picked up against the falling dollar,” said Peter Hug, Kitco’s Director of Global Trading. “Gold support should hold the $1,338 line and a test of the $1,350 area is suggested.” 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.