Weak economic data and dovish Federal Reserve statement weigh on dollar

Investors cut further US dollar bullish bets to $18.2 billion from $23.84 billion against the major currencies in the previous week, according to the report of the Commodity Futures Trading Commission (CFTC) covering data up to February 2. The Federal Reserve interest rate decision and economic data provided little support for US dollar bullish sentiment. Though not as dovish as investors had expected, Fed’s statement no longer contained the assessment of the global risks for economic outlook as being ‘balanced” in light of continued turmoil in global equity markets and slumping commodity prices. Nevertheless policy makers indicated they expect further improvement in labor market and low likelihood of a rapid rise in inflation toward the central bank’s 2% target. Data later in the week showed US economic growth slowed considerably falling to 0.7% in the fourth quarter from 2.0% in the third quarter. Personal spending was flat in December compared with a 0.5% on-month rise in November. While personal spending was flat personal income rose at previous month’s rate of 0.3% month over month. Central bank’s preferred gauge of inflation - personal consumption expenditure price index, rose 0.6% on year in December after 0.4% growth in November, with core PCE index steady at 1.4%. Clearly inflation is slow to rise toward the regulator’s 2% target. Falling durable goods orders in December and continued contraction in manufacturing sector as reflected in declining ISM Manufacturing PMI didn’t provide support for expectations of accelerating growth of US economy. Not surprisingly investors cut bullish bets on US dollar. As is evident from the Sentiment table, sentiment improved for all major currencies except for Japanese yen and Swiss franc. And the yen is still the only major currency held net long against the US dollar.

The bearish euro sentiment improved considerably as net short bets narrowed a sizable $5.38bn to $11.89bn. Euro’s share fell to about 65% of long US dollar position. The euro net short position declined as investors increased long positions and covered shorts by 24566 and 15576 contracts respectively. The bullish Japanese yen sentiment moderated after the Bank of Japan’s surprise decision to adopt a negative deposit rate policy. The net long bets in Japanese yen fell by $1.4bn to $3.8bn. Investors reduced the gross longs by 10520 contracts and increased gross shorts by 2261. Sentiment improved slightly for the British Pound with the net short position narrowing by $0.2bn to $4.0bn. Net short bets in British Pound are now the second biggest after bearish bets in euro. Investors cut both the gross shorts and gross longs.

The sentiment improved for the Canadian dollar with the net short position falling by $1.0 billion to $3.73bn. Investors cut both the gross longs and gross shorts. The sentiment toward the Australian dollar continued to improve with net short bets narrowing by $0.4bn to $1.8 bn. Investors built the gross longs and covered gross shorts. The bearish sentiment towards the Swiss franc didn’t change materially with net short bets rising by just $23 million to $576 million. Investors increased both the gross longs and gross shorts.