The dollar failed to gain traction over the last few days, as US President Donald Trump's tax reform plan underwhelmed investors and raised doubts about how it could get done. Over the last two weeks, the dollar index has dropped 1.5 percent and has underperformed for most of the year to date. The greenback is expected to be in focus next week ahead of a slew of events and economic data, including the Federal Reserve Open Monetary Policy meeting and Friday's US nonfarm payrolls report.
As investors head into a busy week, analysts say the dollar remains vulnerable. "Despite Friday's rally, US data has been terrible," said Kathy Lien, managing director of FX strategy at BK Asset Management in New York. "There's currently a major misalignment between the performance of the US economy and the market's expectations for Fed tightening." Net shorts on the Canadian dollar this week ballooned to 42,642 contracts, the largest since early February 2016 as the United States works to renegotiate the terms of its NAFTA deal with Canada and Mexico.
Meanwhile, long positioning on the Mexican peso swelled to 16,038 contracts, the largest since mid-September 2014. Net short euro contracts, on the other hand, fell to 20,895 this week. Last week, euro net shorts rose to their highest since mid-March. Euro short positioning has eased after independent centrist Emmanuel Macron came out ahead of Marine Le Pen, head of the anti-European Union and anti-immigrant National Front, in the first round of the French election last weekend.
"Without the post-election breakout last Sunday, the euro would not have been this week's best performing currency and politics should continue to provide the single currency with support going into the final round of the French election," said BK's Lien.
Copyright Reuters, 2017