Dollar rebounds from two-year trough on Fed view

The dollar consolidated gains on Thursday after less dovish than expected minutes from last month’s U.S. Federal Reserve policy meeting prompted bears to buy into the heavily shorted currency, fueling its biggest one-day surge in more than two months.

The dollar index, which tracks the greenback’s value against a basket of currencies =USD, had climbed 1% above the two-year low at 92.12 hit on Tuesday and cemented gains at 93.01 in late morning London trading.

Reuters reports that dollar bears have reaped rich returns from shorting the greenback in recent weeks as the U.S. struggled to tame the coronavirus pandemic and the unprecedented policy stimulus unleashed by the Federal Reserve had darkened the outlook for the greenback.

But with short bets approaching historical extremes and a resurgence of COVID-19 cases in Europe, investors are turning less bearish on the greenback.

Deutsche Bank analysts said the recent rise of the euro against the dollar was probably running out of steam.

“With EURUSD having (nearly just) reached our 1.20 target earlier this week we now favour taking profit and see a more balanced outlook as we approach September”, they told their clients.

In a similar move last week, HSBC foreign exchange strategists had also said they didn’t believe the dollar’s weakness would persist much further.

There have been speculations that the Fed will adopt an average inflation target, and look to push inflation beyond 2% to make up for years it has run below, or look to put a cap on government bond yields as part of a wider policy review.

But with the minutes vague on these matters, dollar bears took the signal that the dollar selling may be overdone for now and resumed selling the euro and the Aussie.