The Dollar At The Fulcrum

The US dollar had a tough week.  It fell against all the majors but the Swiss franc and Japanese yen.  Like the dollar, they are often used to fund the purchases of higher-yielding or more volatile assets, giving a greater appearance of safe-haven when those other assets go south, which invariably they do.  Sterling and the Australian dollar recorded new nearly three-year highs. 

The greenback appeared to reverse higher on February 16.  There was follow-through the next day, but it proved for naught, and the dollar finished the week near its lows.  Higher US yields failed to offer lasting support.  The dollar fell when stocks rose and later when stocks fell.  Intermarket correlations are far from stable, especially in the short-run, even in the best of times. They seem particularly volatile now (UDN, UUP).  

Sometimes the dollar is the key mover, and other times it is sort of serves as a fulcrum among the major currencies.  This is one takeaway from the year-to-date performance of the major currencies shown in the Bloomberg table.  This is not just an echo from January.  The top five currencies are also the best performers here in February.  The powerful reflation theme spurred by optimism over the vaccine, significant US fiscal stimulus, and the broadening of the Asia Pacific region's recovery is being expressed in the foreign exchange market.  The dollar-bloc currencies and Scandis often are seen levered for growth.  By shifting the funding of its reserves to domestic sources, Sweden's Riksbank has countered inflows.  

Sterling's uptrend has been nothing short of astonishing.  In the past 16 weeks, stretching back to the end of last October, sterling has fallen in only two weeks.  In that span, it has risen around 11 cents (~8.4%) to nearly $1.4050. Some argue that with the UK leaving the EU, sterling's quantitative characteristics may change, but it seems too early to suggest a paradigm shift. Its performance may have more to do with the stimulus and the relatively successful distribution of the vaccine.  Also, there was a shift in expectations as the market gave up ideas that the BOE would bring the base rate below zero. Speculators in the futures market have amassed the largest gross and net long sterling exposure since last March.  The next important chart area is not until the double top from 2018 (~$1.4345-$1.4375) (FXB). 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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