It’s becoming increasingly clear that this week’s US Dollar (USD) rally is turning into a broader rethink of the consensus short-dollar trade of the past few months, ING's FX analyst Francesco Pesole notes.

No signs of breaking the bipartisan impasse

"Another important factor to consider is the full re-establishment of the dollar’s safe-haven value. That is surely aided by the fact that the other haven contenders, EUR, JPY and CHF, have domestic struggles of their own: gold’s outstanding rally tells us that the dollar still isn’t the number one choice. But, as discussed in recent notes, the US shutdown might be doing the dollar a favour by not adding any negative US data."

"Yet, the move in the dollar still appears overdone to us, and any further gains may be harder to sustain. The yen’s good performance relative to all other G10 currencies except the dollar means that the rotation from USD-funded to JPY-funded carry trades isn’t happening on a huge scale just yet. And yesterday’s were quite simply typical risk-off moves."

"On the shutdown, there are still no signs of breaking the bipartisan impasse, but it’s been reported that the Bureau of Labour Statistics is recalling staff to prepare the September CPI report, which is due on Wednesday. Expectations are cementing around a 0.3% MoM core CPI print, which should greenlight a cut on 29 October. The dollar can consolidate some gains today, but remains at risk of corrections in our view, and another rally would start to bring the greenback dangerously far from what short-term rate differentials justify."