The U.S. dollar rallied this week, putting the previous weekly loss decisively behind it, but that doesn’t mean the embattled greenback has turned a corner, market participants said, pointing to seasonal flows in currencies that likely underpinned its recent bounce.
The ICE U.S. Dollar Index DXY, -0.05% which measures the U.S. currency against six of its major rivals, rallied this week, finding itself on track for a 0.6% gain on the week despite some modest weakness on Thursday, according to FactsSet.
The buck jumped to a one-month high against Japanese yen USDJPY, -0.23% on Wednesday, and a two-month high against the Swiss franc USDCHF, -0.3660%
See: Dollar strengthens by the most against yen in more than a year
“Month and quarter end-related flows may be influencing demand for the dollar a little earlier than usual, given the Easter holiday that may affect liquidity levels later in the week,” wrote Shaun Osborne and Eric Theoret of Scotiabank.
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Indeed, the dollar gauge will have risen every week with the notable exception of one in March. So what happened to the worries about the twin budget and trade deficits or the U.S. economic growth cycle, which analysts say is on its last leg? Those concerns remain valid, market participants said, as the buck’s March gains are correlated to end-of-month and end-of-quarter rebalancing flows.
See: Here’s what ‘twin deficits’ means for the dollar and the Fed
At the end of a quarter, as coming up on Friday, investors tend to window dress their accounts, and those who have been selling dollars to buy higher yielding emerging markets currencies instead, rebalance their investments as an easy way to pick up dollar liquidity while it is available. That demand pushes the dollar higher.
Even though every quarter-end sees some rebalancing flows, the end of March is particularly notable, because it represents the financial year-end for the Japanese government. Japan is one of the largest investors in U.S. dollar-denominated assets, and its rebalancing actions drive a lot of the dollar flow in March.
But fundamentally, little has changed for the greenback.
“We still view the dollar are fundamentally and technically vulnerable,” Osborne and Theoret said. “We expect investors to gravitate away from the dollar as the global economy picks up momentum and growth levels and interest rates rise outside of North America; we also expect accumulating deficits in the U.S. to weigh on sentiment.”
Read: Twin deficit isn’t the whole story behind dollar weakness, according to Pimco
And in the short-term? It doesn’t look much better.
April tends to be a bad month for dollar performance, judging by historical data, the Scotiabank strategists said. Last year in April, the dollar index slipped 0.9%, in 2016 and 2015 it was down 2.2% both years.
Of course, historic performance isn’t necessarily an indicator of future performance, but dollar bulls might still do well in buckling up.
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