The strength of the U.S. dollar seems to be wavering. Tuesday saw the worst day for the dollar against major currencies since October 2013.
Analysts attribute the drop to the last economic report which showed weakness in some fiscal areas and put into question the Federal Reserve’s expected interest hike. According to their view, if implemented, the rate increase would send a message to investors who had bet against the euro in an effort to cover their short bets to repurchase the currency, a move that would cause the dollar to weaken even further.
Another factor that may have contributed to the dollar’s slide is the concern surrounding Greece’s hefty debt and how the country is proposing to handle it. Following Greece's proposal for ending a standoff with its creditors on Tuesday, the dollar index, which measures the greenback against a basket of six major currencies, fell nearly 1 percent for the day while the euro hit a nearly two-week high against the dollar at $1.15340.
"It is pretty obviously just a big wave of short-covering that has fed on itself," David Rodriguez, a quantitative strategist at DailyFX.com, a unit of retail FX broker FXCM in New York, said of the euro's rally.
Wednesday Turn Around
By Wednesday, things had turned around. The dollar index rebounded, buoyed by a jump in Treasury yields, their biggest one-day rise in more than 14 months, and in anticipation that reports later in the day would show more positive U.S. economic data. The dollar index was up 0.25 percent to stand at 93.826, as investors sold their long dollar positions and took profits.
Many analysts, however, doubt whether this upward trend will continue, citing the existing differences in the monetary policies between the U.S and the euro zone. High hopes for the Euro’s recovery may be withering as Greece’s new policy loses steam.
Wednesday saw the euro drop to $1.1450, still remaining well above an 11-year trough of $1.1098 set last week.
Jeremy Stretch, head of currency strategy at CIBC World Markets posits, "We have seen a shakeout of some stale long dollar positions and lightening of short euro positions on hopes of a new Greek deal."
According to Stretch, "The dollar bid bias remains in place and if we continue to see good jobs data as well as earnings improve in the United States in the coming days that could bring the shine back to the dollar."
Data to be released this week--the monthly ADP private payrolls and ISM non-manufacturing figures—today and U.S. non-farm payrolls data on Friday may bring a certain amount of stability back to the dollar.