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An unfolding battle for the Dollar

  • May 28
    The markets are now seeing renewed pressure on the US currency and an
    increase in demand for risky assets due to soft comments from the Fed.
    Richard Clarida reminded us that the FOMC would warn us before
    considering winding down its asset purchase programme for the central
    bank balance sheet. Rafael Bostic pointed out that “it is not the time”
    to think about policy changes. Both agree that the labour market is
    unstable, and therefore, the pressure on prices is temporary.To get more
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      These comments cemented the market reaction to the labour market
    report earlier in the month when the Dollar fell and stock buying
    intensified. Later markets tensed up, fearing the Feds reaction to
    accelerating inflation. However, the Fed continues to react
    asymmetrically to the information, wary of any weak data and slow to
    celebrate robust statistics.

      All this created a negative backdrop for the US currency and allowed
    the Dollar index to plummet under 90: a significant round-level support
    during the last five months. EURUSD and GBPUSD also took their round
    levels, with the Dollar crossing 1.2200 and 1.4200, respectively.

      It is now as if history from the early 2000s is repeating itself, the
    days of the “Greenspan put” when the Fed maintained a stimulative
    monetary policy, finding a weakness in individual economic indicators
    and ignoring the overall acceleration in the economy and inflation. With
    this policy, we have seen increased pressure on the Dollar against
    major competitors and multiple increases in the prices of underlying
    commodity assets.

      Long-term investors need to understand that the situation may be
    radically different from what we saw 20 years ago. After all, a lot is
    in the hands of politicians, including the lessons of the past. Yet, at
    the same time, the markets reflexive reaction so far is repeating all
    this, forcing market participants to sell dollars and to bet on emerging
    markets and commodity assets.

      We will have to listen carefully to the words of the Fed members once
    again when the dollar index is renewing multi-year lows. Note, the
    dollar index is now at 89.75. This year‘s low is 89.16, and 2018’s low
    is 88.15. This concentration of pivot points promises an interesting
    battle in the currency market in the near term. However, so far, we see
    more signals in support of bearish USD positions.