Dollar Softness Puzzles Analysts Amid Strong Fundamentals

Despite strong fundamentals in the US economy, including higher energy prices and firm short-dated US rates ahead of the August CPI release, the US Dollar has been unexpectedly soft. According to ING's Chris Turner, the dollar's performance this week has been 'a little disappointing/confusing'.

The strong equities market and a fragile USD/JPY are key drags on the dollar, Turner notes. Global equity markets remain near their peaks due to the AI investment boom, keeping global growth relatively resilient, he adds.

The negative correlation between equities and the dollar is one of the tightest in FX, making it difficult for the dollar to strengthen. Additionally, global macro hedge funds are positioning for a downside break of 150 in USD/JPY over the coming months, expecting Japanese policymakers to deliver on their side of some grand bargain with Washington.

ING does not expect the DXY to immediately break support at 98.55/65, but notes that if it were to break, USD/JPY would be the driver, and a quick drop in DXY to 98.00 could be seen.