The dollar index closed higher on Monday for only the second time in ten days of trade as it pared some of the hefty declines seen on Friday. Overextended currencies against the buck were the initial catalyst for the pullback in some riskier currencies but weakness in global equities and a modest decline in commodities helped boost the buck too. Additionally, a lowering of growth expectations by the IMF early in the US session and fresh concerns about the nuclear crisis in Japan gave the greenback a much needed lift.
We urge caution before rushing back into dollar long positions, while the buck may be trading at very enticing levels against some currencies we doubt that this will be the beginning of the long awaited reversal in fortunes for the buck. We suspect that it is more likely that, as we have seen in the past time and again, this very modest dollar rally will only be used as a fresh opportunity to sell the buck. The dollar index remains locked in its downtrend and still has plenty of work to do before we can even suggest a short-term bottom may be forming.
Written by Jonathan Granby, DailyFX Research Team