Dollar looks attractive after the July decline
The American currency had a tough July but tried to finish on a high note. From the intraday lows of the beginning of the day on Friday, the dollar index on ICE reversed to growth, adding more than 1.1% before trading began in Europe.
It's hard to say right now if we have already seen a monthly or weekly profit-taking, and if this pullback will continue throughout August.
However, other factors of influence on the American currency should be considered as well. Demand increased as the discussions stalled over a new stimulus package. For the most part, it is an inter-party struggle, which is becoming more and more intense as the USA elections date approaches.
Observations also suggest that changes in the ruling party often trouble the stock markets. This is due to expected changes in the priorities of the new president: Democrats are in favour of increased incomes, stricter regulation and higher taxes for business; while Republicans, on the contrary, support deregulation and lower corporate taxes.
Such polarity in point of view leads to changing leaders in the stock market: from I.T. and growth companies to protective and consumer sectors.
This, of course, has a direct impact on the dollar. The American currency was seriously losing along with increasing chances of Biden winning. However, the weakness of the dollar supported the American markets. At the same time, the yield of 10-year Treasuries updated record lows, and this is a reflection of the high demand for such assets.
The situation could have been much more serious if the decline of the dollar was accompanied by a sell-off of U.S. stocks and/or bonds. Currently, this is not happening, so it is quite possible that the U.S. currency may develop a pullback.
The adoption of the support package promises to lead to a new wave of placements in the markets. And since the Federal Reserve has finished the active phase of buying securities, this money may come into bonds through the sale of shares or assets on foreign markets.
After falling to a two-year low, the dollar index shows the attractiveness of buying American currency, which can be used by the U.S. Treasury.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
