By Harry Robertson

LONDON (Reuters) – If buyers agree on one factor this 12 months, it is that the greenback goes to fall. That is made the buck’s 2% bounce during the last month significantly complicated.

U.S. inflation is cooling and the Federal Reserve could pause its rate of interest hikes subsequent month. So the greenback must be on the best way down, proper?

Analysts say numerous elements are most likely at play. One is {that a} vary of worries – concerning the U.S. debt ceiling negotiations, the well being of banks, and the worldwide financial system’s outlook – are burnishing the greenback’s safe-haven credentials.

In the meantime, there are some indicators that the Fed could have to lift charges once more, and that extra technical elements to do with investor positioning are concerned.

DEBT CEILING FEARS

The – which measures the U.S. foreign money in opposition to six others – has risen roughly 2% for the reason that center of April to round 103, though it is nonetheless down round 10% from final September’s 20-year excessive of 114.78.

The go-to rationalization of foreign money strategists proper now could be the debt-ceiling debacle is boosting the greenback.

Democrats and Republicans are inching nearer to reaching an settlement on elevating the $31.4 trillion borrowing restrict. However the specter of a probably catastrophic U.S. debt default lingers, at a time when many banks look weak.

When markets are confronted with worries like that, they typically purchase much less dangerous belongings corresponding to bonds, gold, and {dollars}.

“The latest USD energy is basically pushed by elevated safe-haven demand in view of ‘unknown unknowns’,” mentioned Esther Reichelt, foreign money strategist at Commerzbank (ETR:).

“How extreme are vulnerabilities in U.S. regional banks and what is perhaps the fallout of an escalation within the U.S. debt ceiling battle?”

Some worrying indicators about international financial development may be contributing to safe-haven shopping for. Information out of China this week confirmed that its financial system underperformed in April.

THE FED MAY NOT BE FINISHED

Alvin Tan, head of Asia FX technique at RBC Capital Markets, doubts the safe-haven argument.

If buyers had been apprehensive, shares can be falling, he mentioned. In actuality the has been flat for the reason that center of April and is up greater than 8% this 12 months.

Tan mentioned issues that the Fed has not but slain inflation are a part of the story. A College of Michigan survey launched final week confirmed shopper inflation expectations rose to a five-year excessive of three.2% in Might, lifting bond yields and the greenback.

Merchants at the moment count on the U.S. central financial institution to chop rates of interest sharply later this 12 months as a recession takes maintain, but Tan is skeptical.

“We expect there’s an opportunity that U.S. rates of interest might grind greater,” he mentioned. “We stay unconvinced by the argument that the greenback is on a gentle decline from right here.”

NATURAL REBOUND

For different analysts, so-called technical elements are at play.

Buyers have mounted huge bets in opposition to the greenback. The online brief bets of hedge funds and different speculators amounted to $14.56 billion final week, knowledge from the Commodity Futures Buying and selling Fee reveals, the largest such place since mid-2021.

Counter-intuitively, that positioning may also help drive rallies. If the greenback rises barely, some merchants could also be compelled to shut out their brief positions by shopping for the greenback, which then boosts its worth.

“The greenback may be very, very oversold,” mentioned Chester Ntonifor, FX strategist at BCA Analysis.

“That is one technical indicator. However a easy technical indicator is that it is rather atypical so that you can have a straight-line decline within the greenback.”