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The US dollar is down against most major currencies over the past week, with the initial catalyst for its decline coming from a rather surprising source, according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“Friday’s EU agreement on migration, despite doubts over its workability, clearly caught euro traders off guard. EUR/USD rose more than a cent on Friday and remains up 0.8% over the week at time of writing.”

“There were some wobbles on Monday as German chancellor Merkel faced down a rebellion within her coalition over migration, but this was resolved – at least for the short term. Having thus fended off another local political challenge, EUR/USD looks comfortable inside the rough 1.15-1.18 range of the past 6 weeks.”

“We were a little surprised that AUD/USD also rallied on the EU deal. But somewhat more logically, much of A$ movement in recent sessions has been driven by the Chinese yuan.”

“The yuan’s fall against a rallying dollar was larger than those of other Asian currencies, an unusual situation. This threatened to produce a self-perpetuating wave of USD/Asia gains, with collateral damage on AUD/USD.”

“So the comments from the top officials at China’s central bank on Tuesday about keeping the yuan stable should be a circuit-breaker. The US tariffs on $34bn of Chinese goods imports that take effect Friday and China’s retaliation will linger over the yuan.”

“But for now, the likely resumption of USD/China stability, plus the steadying EUR, point to Dollar Index consolidating rather than making a run at 96. Reaching that level might require markets to price in quite a bit more than the current 34bp in Fed funds hikes before year-end.”