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USD Faces Uphill Battle Following Big Month/Quarter End Flows



The USD was hit by an aggressive wave of trading on the file day of trading for the month and quarter. During the latter stages of the European session with the US players well into their respective day, things became volatile on Tuesday.


In terms of these flows, they were very much geared towards Dollar weakness, which was observed also at the back-end of May. A time when fundamentals and technicals go out the window more or less, due to real transactional FX flows.

Why does this happen?


Big players i.e.; pension funds, hedge funds any player that manages client investments across a variety of asset classes, will typically have requirements to conduct foreign transactions. It all depends on their books, where geographically they are exposed to, in terms of investments.


Let's take a look at an example; a fund manager has a portfolio which is split across European, UK, U.S. and Asian equities/stocks. One quarter their U.S. part of their fund outperforms the other markets, so they have an excess of USD profit. For exposure purposes, they need to keep their books balanced.


The excess profit in USD that they made, at the end of the month or quarter, they will sell those dollars and convert into GBP for the UK exposure or EUR for the European exposure and so on, in order to keep thanks balanced.


Over the last three months, US stock indices have performed relatively well versus their peers. So, these fund managers have an excess of USD, they are selling their dollars, the market sees an outflow of USD at a decent volume, which results in USD weakness. To have a greater understanding of things such as this, do not hesitate to check out our fundamental course for greater market knowledge.

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