Follow-Through Dollar Buying After Yesterday's Reversal Tests The Bears

The euro posted a key reversal yesterday, and follow-through selling took it to a six-day low near $1.2060.  The euro frayed the $1.2150-cap yesterday, rising to almost $1.2170 before reversing lower and settling below Monday's lows. A break now of $1.2035 would lend credence to our view that the euro's downside correction is not over. There is an option for 540 mln euros at $1.2020 that expires today. While intraday moment readings are stretched, the North American participants have appeared more dollar-friendly in recent sessions. Sterling briefly poked above $1.3950 yesterday before retreating. It is heavy today, testing support near $1.3860 in the European morning. Intraday indicators are stretched, but a break here could signal a test on the $1.38-level, which houses an option for about GBP255 mln that expires today.  


Fed talk was interesting yesterday and may offer insight into what Chair Powell will say next week during his semi-annual congressional testimony. The common theme was that inflation is not a problem. Kansas Fed President George told her audience that she was not concerned by the rise in long-term yields, linking it to growing optimism about future growth. San Francisco's Daly argued that unwanted inflation is not around the corner and that there are still downward pressures on prices. She warned that a worry about inflation now leading to premature tightening of financial conditions could cost millions of jobs. St. Louis Fed President Bullard said that the FOMC is not thinking about tapering and also played down any immediate inflation threat. He also pushed back against claims that the spectacular rise in Bitcoin has no impact on Fed policy.  

Bullard seemed more sympathetic to arguments that Bitcoin poses a greater challenge to gold than to the dollar. It seems like a bit of a Rorschach test. Some claim that Bitcoin says something about the world economy and the US place in it, which appears to be more a confirmation bias than a robust demonstration of linkages to the dollar's role as numeraire and as largest reserve asset. It is a new skin for old wine. The arguments are wrecked on the same shoals as the earlier attempts. There is simply no compelling alternative. To shift reserves out of Treasuries because of the rise of Bitcoin results in lower yields, less liquidity, and arguably less security and transparency. That claim there has been a loss of trust in the dollar is not supported by the IMF's authoritative data. Dollars held in reserves rose 25% from the end of 2016 through Q3 2020 to $6.9 trillion. 

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Read more by Marc on his site Marc to Market.

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