The US Dollar (USD) has fallen since Monday, in line with our call. While there are some signs that optimism over the Ukraine peace deal is supporting European currencies, short-term misvaluation warrants a dollar correction. Despite this, the dollar remains expensive compared to short-term market drivers, and with markets boosting their bets on a December Fed cut, risks remain on the downside for the US dollar on Thanksgiving, notes Francesco Pisol, FX analyst at ING.
USD correction supported by poor short-term valuation
“Some of the headlines that Ukraine had accepted the terms of the peace deal turned out to be misleading yesterday. The tone was generally constructive, but there are sticking points that Ukraine and Russia are still negotiating with the United States. What is clear is that the United States is making its strongest attempt yet to broker a truce, and that Ukraine is open to some degree of compromise. The United States is sending its peace envoy, Steve Witkopf, to speak with President Putin today. Any signs of a breakthrough? It should influence energy prices and the dollar, while favoring European currencies with high betas.”
“Domestically, one interesting development at the Fed: Kevin Hassett is said to be the front-runner to replace Powell as chair, and an announcement could come before Christmas. Hassett is one of the most dovish candidates, and his nomination could push markets to revise the final interest rate (now just below 3.0%) and weigh on the dollar.”
“Finally, we have published a preview of the Treasury’s foreign exchange report, which is scheduled to be released in the coming weeks after the shutdown delay. Based on our estimates, no country met the three criteria, and no signs of a foreign currency manipulator should be announced in this report. However, Thailand should join the watch list.”
