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Dollar should rally if risk aversion rises

Dollar bulls have had a challenging time of late and it looks like the rest of the summer will leave them sweating.

The dollar index has slipped further below levels achieved at the height of the Trump trade.

Investors’ faith in the ability of the US administration to deliver on its pro-growth agenda and plans for fiscal stimulus is faltering, just as a fresh round of budget negotiations loom.

That is likely to put further limits on the White House’s room to manoeuvre.

Nonetheless, don’t write off the chances for the world’s reserve currency for the autumn and into the third quarter.

That’s the message from fresh analysis from ANZ.

The bank expects the dollar to “find its footing” later in the year.

“Not because of strong growth and exceptional [monetary] policy divergence” explains Daniel Been, head of FX strategy, “but rather because of a rise in risk aversion.”

That will open the way for a more traditional form of dollar rally, sparked by the haven appeal of the world’s reserve currency.

There is rarely, if ever, a single driver of sentiment in the world’s most liquid market.

So Mr Been cautions currency investors that “against the euro and the yen, [monetary] policy dynamics will still matter”, leaving some risk of further dollar pressure against those major rivals.

But against its Australian and New Zealand counterparts as well as cyclical Asian currencies, the dollar will, concludes ANZ, “continue to advance”.

michael.hunter@ft.com