Investors Unwind Long Dollar Trades

Investors continued to unwind their long dollar positions this morning with the greenback trading lower against all major currencies. Tapering by the Federal Reserve should have been positive for U.S. yields and for the dollar but all the gains incurred since Janet Yellen's first meeting in March have now been lost. Policymakers will be happy to see yields back up and the dollar weaken because it means the market understands that monetary policy remains extremely accommodative despite their reduction in asset purchases. In other words, forward guidance is working. Improvements in economic data have been slow and with an unimpressive March non-farm payrolls report, investors are reducing their long dollar trades and positioning for an extended period of low rates. U.S. 10 year bond yields need to hit 3% for there to be any enthusiasm about the dollar.

The marginal increase in U.S. yields tells us that the sell-off in the greenback is not just driven by the market's distaste for dollars. Stronger than expected industrial production in the U.K. drove sterling sharply higher while BoJ Governor Kuroda's comment that no additional easing it required at this time sent the Nikkei and the Yen crosses sharply lower. The euro is supported by less dovish comments from the ECB while the commodity currencies are driven higher by the rise in commodity prices and stronger New Zealand business confidence. The lack of U.S. data this week raises the importance of relative growth.

With no major U.S. economic reports scheduled for release today the focus will be on speeches from Federal Presidents Plosser, Kocherlakota and Evans. Since Plosser and Kocherlakota are voting members of the FOMC this year, their views on monetary policy and the economy are important but surprises are unlikely especially since Plosser is speaking on Bank Regulation. These two gentlemen are on the opposite sides of the dove hawk scale but they both agree that asset purchases need to be cut this year. Unfortunately their comments about staying on course may not lend much support to the greenback.