A magnifying glass is held over a 50 subject one dollar note sheet in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Dollar Threatens Crucial Levels as Rally Enters Decisive Week

(Bloomberg) -- The dollar’s consensus-defying climb has the currency approaching pivotal levels at the start of a week that could make or break its rally.

The greenback’s almost 3 percent advance since April 17 has the ICE Dollar Index a whisker away from its 200-day moving average, a level it hasn’t touched since May 2017.

One of the biggest questions in the foreign-exchange market -- whether the U.S. currency’s bout of strength has legs or will fade as sellers emerge at key technical levels -- could be resolved in the coming days. This week brings a mix of top-tier economic data, a monetary policy decision from the Federal Reserve and the Treasury’s quarterly refunding announcement. It all comes as speculators are close to the most bearish on the greenback since 2013, Commodity Futures Trading Commission data show.

“The risk in the FX universe is that the current dollar squeeze turns into a more enduring fundamental rally,” ING Groep NV currency strategist Viraj Patel wrote in a note Monday. “The event-filled U.S. calendar in the week ahead will provide further evidence over which way the U.S.-rest of world economic pendulum is swinging.”

Dollar Threatens Crucial Levels as Rally Enters Decisive Week

The dollar faced its first test Monday, with the index gaining about 0.2 percent after U.S. consumer spending rose as expected in March while the Fed’s preferred inflation gauge increased to the central bank’s 2 percent target for the first time since February 2017. U.S. economic data also close out the week, with payrolls and earnings data due on Friday.

Global Update

FX markets will also get an update on the state of the synchronized-global-growth trade. The euro region’s gross domestic product reading on Wednesday is expected to show a first-quarter slowdown. That result could push the euro lower and set up a test of its own 200-day moving average at $1.2013 if the contrast with the U.S. economic trajectory is stark enough. It traded at about $1.2090 Monday.

“Weakening non-U.S. growth leaving the impression that the global economy is turning less synchronized will support the dollar for now,” Morgan Stanley strategists led by Hans Redeker wrote in a note Monday. The Fed “has no reason to be dovish.”

Before FX markets digest the Fed’s decision Wednesday -- officials aren’t expected to raise rates -- traders must contend with the Treasury’s refunding announcement that morning. Analysts predict another boost to auction sizes.

An increase in long-dated issuance could boost the dollar, given that foreign investors typically favor the back-end of the curve, according to Morgan Stanley.

And if investors are still in search of fresh cues, geopolitical anxieties may return to the fore. Temporary exemptions on steel and aluminum tariffs are set to expire May 1. Though Mexico and Canada are likely to be granted an extension, according to Patel at ING, it’s unclear whether the same can be said for Europe -- and that uncertainty may benefit the dollar.

“U.S. trade policy will be back in focus this week,” he wrote. “This trade war escalation may keep risk appetite on the back foot.”

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