The DXY Index ended last week slightly higher, recording its first weekly increase since mid-June.

After surging at the start of the Covid-19 pandemic due to strong demand for liquidity, the US dollar is recording a steady erosion. In July, its DXY index recorded its worst monthly performance in ten years, with a fall of 4.1% bringing to 9% its decline since the peak reached

Nevertheless, the DXY dollar index finished up slightly last week, recording its first weekly increase since mid-June. Dollar consolidation is expected to continue.

UBS research identified three factors that could lead to a pause in the greenback's depreciation trend that could, in the short term, regain some of the lost ground.

WORRYING TRENDS IN EUROPE
In recent weeks, the depreciation of the dollar is due in part to the sharp rise in the number of coronavirus cases in certain areas of the United States. Now, the Covid-19 epidemic seems to be slowing down. In fact, during the weekend of 8 and 9 August, new cases increased by only 1% on average, compared to 1.6% on average during the previous five weekends

Net short positions in the dollar against the euro held by
speculative accounts reached their highest level since 2018.
On the other side of the Atlantic, the number of new cases is increasing more rapidly. On August 7, the transmission rate in Germany rose to 1.16, its highest level in ten days. While in Italy, the number of new cases is at the highest level in two months.

THREAT OF A BUDGETARY CLIFF
The specter of a “fiscal cliff” in the United States with the expiration of supplementary unemployment benefits has also weighed on the dollar. Negotiations between Democrats and Republicans have reached an impasse, so much so that President Donald Trump signed four executive orders last weekend approving a series of fiscal stimulus measures. Among them, assistance of 400 dollars per week in the same vein as the expired CARES (Coronavirus Aid, Relief, and Economic Security) device

Congressmen have not yet reached an agreement. However, with the presidential election approaching, both Democrats and Republicans have every interest in it, so it is likely that a new stimulus package of at least $1 trillion will be adopted. That should give the greenback some breathing space

SHORT POSITIONS ON THE RISE
According to data from the CFTC (Commodity Futures Trading Commission), net short positions on the dollar against the euro held by speculative accounts reached their highest level since 2018. Hence the potential for profit-taking if the news ever becomes more favourable to the dollar.

When it comes to the EURUSD exchange rate, the dollar
will certainly depreciate to 1.22 by September 2021.
However, in the longer term, the dollar's downward trend remains intact even though its depreciation will certainly be slower. Explanation in three points as well.

Extremely lax fiscal and monetary policies in the United States, which have resulted in an erosion of the interest rate differential in favor of the dollar, are expected to continue.
Uncertainty about the results of the American elections is likely to continue to weigh on the dollar. Even after the presidential election, uncertainty about fiscal policy and the size of U.S. debt could continue to undermine the greenback.
Before the Covid-19 crisis, many long-term investors had exceptionally high exposure to the dollar in order to take advantage of the considerable interest rate differential between the greenback and other funding currencies such as the Swiss franc and the yen. They will probably remedy this overexposure. Indeed, CFTC data shows an increase in net long euro positions held by asset managers, which rose from 223,000 to 337,000 contracts between the end of May and the end of July.
Therefore, tactically, this is not the time to speculate on the continued depreciation of the dollar. But, given the longer-term trend, investors would do well to review their strategic positioning and change it if necessary

As for the EURUSD exchange rate, the dollar will certainly depreciate to 1.22 (in the middle of the 1.20-1.25 range) by September 2021. One would be tempted to increase exposure to the euro when the pair falls back to 1.15-1.16. For the USDCHF pair, UBS Research has set its price target at 0.90 over the same time frame. The Swiss National Bank has recently reduced its interventions on the foreign exchange market, but it should continue to intervene to limit the appreciation of the franc.