US Dollar Index: Range-bound with conflicting currents – MUFG

USD remains range-bound for now as the DXY index is trading toward the top of the 92.000-94.000 range that has held for most of the period since toward the end of July. There are now so many macro factors for market participants to focus on it is no wonder that FX markets remain mostly within recent ranges, according to economists at MUFG Bank.

Key quotes

“We see little change in the two biggest negatives for market sentiment at the moment. The first is the significant re-escalation of COVID-19 in Europe and some signs of re-escalation in the US as well .The second is the failure in the US to reach a deal on a fiscal stimulus package ahead of the election. President Trump is holding out hope, stating on Thursday he is willing to go above the Republican limit of $1.8 trillion while US Treasury Secretary Mnuchin stated Trump could persuade Senate Republicans to support a bigger package. We and the financial markets remain sceptical.”

“The markets for now remain half-hearted in its conviction on reducing risk. This makes sense for now given the large-scale fiscal stimulus likely in 2021. What that means for inflation and the US deficit outlook point to the strong need for a weaker US dollar in order for these large-scale deficits to be financed going forward.”

“There are two natural market adjustment mechanisms for higher levels of capital requirements in the US – higher rates or a weaker US dollar. We are betting on the Fed following through with its commitment to cap rates, leaving the US dollar as the only viable adjustment mechanism for financing record deficits going forward.”