Risk flows and falling US Treasury bond yields forced the greenback to stay on the back foot on Thursday. But in the view of economists at MUFG Bank, there is compelling reason to believe the scale of US dollar weakness looks to be more a positioning squeeze rather than any notable change in the global macro backdrop.

Long USD positioning squeeze prompts correction

“Our 2-year z-score measure of overall USD positioning at the most stretched since 2015 backs up the prospect that this move is related to an excessive build-up of USD longs that are now being liquidated.”

“Our view on the US dollar remaining well supported through Q4 is also based on global growth uncertainties persisting. The CRB Index has broken higher again but we doubt this is a sign of increased growth optimism and hence the correlation with a weaker US dollar is unlikely to hold.”