FOREX-Dollar rallies after weakest month in a decade

* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E
* Dollar index gains 0.4%
* Euro trades near $1.17
* Yen rally halted, USD/JPY falls past 106 mark

By Ritvik Carvalho
LONDON, Aug 3 (Reuters) - The dollar rallied against a
basket of rivals on Monday as a squeezing-out of crowded short
positions combined with safe-haven demand gave the currency some
respite after its weakest monthly performance in a decade.
The dollar index =USD , which measures the greenback
against a basket of leading currencies, lost more than 4% in
July, its biggest monthly drop since September 2010. It is down
10% from its peak in March.
Analysts put the slide down to waning safe-haven appeal as
financial markets recover, market expectations for further
easing of U.S. monetary policy, and a lack of agreement among
U.S. lawmakers on further fiscal stimulus. Falling U.S. bond
yields have also been cited as a factor.
"The factors that have seen DXY (the dollar index) fall 10%
from its spike high in March are still in place and we expect a
‘sell the rally' mentality to develop through August," ING
strategists said in a note to clients.
Speculators' net shorts on the U.S. dollar have soared to
their highest since August 2011 at $24.27 billion, Reuters
calculations and U.S. Commodity Futures Trading Commission data
show. IMM/FX
A partial squeezing out of that crowded short position may
be the reason for the dollar's rally in the past couple of days,
analysts said, also citing rising geopolitical tensions between
the United States and China.
"There's usually something that trips global markets up in
August, and this year might not be different given the growing
list of market risks," said Viraj Patel, global FX and macro
strategist at Arkera.
"Given the way that risky assets have rallied in recent
months, this rising geopolitical threat could lead to a squaring
off in positions and potential reversal of recent trends that
would help the dollar recoup its recent losses."
The dollar index was up almost half a percent by midday in
London =USD , with the greenback higher against all currencies
in the basket on which the index is based. CHF= SEK= EUR=
GBP= CAD=
Against the Japanese yen, the dollar gained 0.1% to push
past the 106 yen per dollar mark. JPY=
On Friday, the dollar posted its biggest daily rise against
the Japanese currency since March, halting a rally in the yen
which saw it gain 3% in July.
Japanese Finance Minister Taro Aso described the yen's
recent rise as "rapid" on Friday, signalling concern that a
strong currency could do more damage to an export-led economy
already in recession. GAP
Investors have reasons to worry about the U.S. outlook as
policymakers struggle to clinch a deal to pump more money into
the world's largest economy. "We'll also be focusing on (the U.S.) Congress, where the
$600 per month unemployment benefit boost has now expired and
the parties are wrangling over the design of the Phase IV
stimulus package," ING said in a note.
"Delays here may upset asset markets, which typically tend
to struggle a little more in August."
A growing U.S. fiscal deficit to finance the stimulus
prompted Fitch Ratings to revise its outlook on the United
States' triple-A rating to negative from stable. While there has been no immediate market reaction to the
downgrade, the European Union gained a lift from Standard and
Poor's decision to upgrade its rating outlook on the bloc to
positive from stable. Sentiment on the euro has improved after EU leaders agreed
last month to a 750 billion euro ($882 billion) economic
recovery fund while also taking on debt jointly in a show of
regional cooperation.
The single currency traded at $1.1763 EUR=EBS in morning
trade in London, off a two-year high of $1.1908 hit last week.
($1 = 0.8500 euros)

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Dollar's worst monthly performance in a decade https://tmsnrt.rs/3k28ghc
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