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USD strength reversal approaching - BTMU

FXStreet (Łódź) - According to Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ the downside correction in risk assets should be accompanied by a reversal of USD's recent strength.

Key Quotes

"The US dollar has weakened further in the Asian trading session having declined modestly after peaking earlier this month. A reversal of recent US dollar strength is underway alongside a correction lower in risk assets."

"The sell-off in the US equity market extended overnight with the S&P 500 index closing below its’ 200-day moving average for the first time since mid-November 2012. It has now fallen by just over 7.0% since its peak from the 19th September."

"More risk-averse trading conditions have also resulted in the VIX equity volatility index spiking to its highest level since mid-2012 which was during the most acute phase of the euro-zone sovereign debt crisis. Building safe haven demand is serving to reinforce downward pressure on US yields in the near-term."

"The two-year Treasury bond yield has fallen sharply in October reversing all of the move higher recorded between mid-August and the end of September. The sharp pullback in US yields is beginning to have more of an impact in prompting a reversal of recent US dollar gains."

"The dollar index recorded its first weekly decline last week ending twelve consecutive weeks of gains. There still appears some scope for the US dollar to weaken further in the near-term."

"The US dollar’s recent strong run of interrupted gains encouraged a large build up in long speculative US dollar positions. According to the latest IMM report, long speculative US dollar positions reached a new record high in the week ending the 7th October."

"Long speculative US dollar positions were most elevated against the Australian dollar, the euro, and the yen. The elevated level of long speculative positions leaves the US dollar vulnerable to a position squeeze which could reinforce selling pressure in the near-term. As was likely evident yesterday when EUR/USD climbed sharply to an intra-day high of 1.2769 after breaking above the 1.2700-level."

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