What’s Up With The US Dollar?

By Kathleen Brooks, Research Director UK EMEA, FOREX.com

The USD is one of the worst performers in the G10 so far this month, and is down more than 4% vs. the GBP, and 3% vs. the NOK and AUD. Even the EUR, which has been weighed down by the ECB’s QE programme and the ongoing Greek sovereign debt crisis, has managed to eke out more than 2% in gains vs. the greenback so far in May.

What is driving the dollar lower, and can it last?

•          US economic data continues to surprise on the downside, the Citibank economic surprise index for the US has slumped to a 3-year low, which could delay the timing of the first Fed rate hike.
•          On that note, the market has also pushed back expectations for when the Fed will raise rates; the market now expects only 30 basis points of tightening before the end of the year, which is a little over 1 hike. If we continue to see weak economic data then a rate hike could be priced out for 2014 altogether.
•          Momentum – the dollar has made a series of lower lows, and the downtrend continues to look entrenched. It has already fallen through key support including the 200-day sma and is below the daily Ichimoku cloud, suggesting that weakness in the buck could be here to stay.

The yield effect:

Interestingly, as you can see in figure 1, the dollar is selling off even though bond yields are rising. The 10-year Treasury yield is now at its highest level since November. Usually rising yields can lend support to a currency, but not so with the dollar. Why? 

1.        The dollar’s relationship with yields looks weak at best. It rose while Treasury yields were falling, and is falling as they rise.
2.        If the rise in global DM bond yields is a sign that the global economy can avoid the scourge of deflation and is thus a collective sigh of relief, it would be natural for a safe haven like the dollar to weaken.
3.        US yields may be rising, but they are rising faster elsewhere, for example in Germany, which is why the dollar cannot keep up.  As you can see in figure 2.

 Conclusions:

The dollar rally is on hold for now and has sold off some 7% since peaking in mid-March. This does not look like a mere pullback, if we continue to see weakness then it could be curtains for the dollar rally that the bulls were waiting so long for.

In the meantime, we would be cautious about looking for a reversal in the dollar at this stage, as the downtrend seems fairly entrenched. We think GBP could rally to 1.60 and beyond in the next week or so, and there may be further gains for EURUSD if we continue to see upward pressure on German bond yields. 1.1534, the high from end of Jan, is a critical level of resistance for EURUSD that opens the way for a return to 1.20.
 

 
Now you can follow us on Twitter: http://twitter.com/FOREXcom

Re-published with permission. Views expressed are not by association FNArena’s (see our disclaimer).
 
 
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Conduct Authority (FCA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms