M. Burgess, FX Strategist at RBS, on the US Dollar performance and its key drivers
At the moment we see some Dollar weakness against G10 currencies, or more specifically against the Euro and other commodity currencies. I think this is largely a combination of some optimism around the fact that we may see a Greek government in place quite quickly and also the fact that there might be some more liquidity measures from the G20 central banks at some stage, given what we have heard from the G20 summit this week. There are also some more funds meant to be provided to the IMF rescue firewall. This is all providing some support for risks in the markets, which tend to weaken the Dollar. There are some expectations that there is going to be some further easing from the Fed at today’s meeting. I believe that has been largely driven by the soft data that we have seen and also the increased worries around Eurozone. That has lead people in the market to think that there might be the Fed easing. I assume at this stage they are unlikely to be extending QE at this meeting. Thus, this may provide some support for the Dollar if we do not get the easing measures at today’s meeting.
On the contrary, if the officials do more asset purchases, this would be negative for the Dollar against a broader range of G10 currencies. If they do not implement QE, but they decide to extend the Operation Twist, which is a form of easing, but it is not an aggressive easing and asset purchases, I think this would probably be a disappointment for the market participants, and therefore you would see some risk pull back in the market in terms of riskier assets, hence the Dollar would find some benefit. We do think that the Dollar gains would be quite limited even if we see some easing from the Fed.
As to the main drivers for the US Dollar, it is QE risk, because the EU summit is coming on 28-29 June. The key risk remains whether or not we see anything from there in terms of policy response for the region. If we do see policy response and that would be taken positively by the market, the Dollar would be likely to be sold off as a result. If it disappoints, the EU summit has tended to disappoint in previous occasions, then I think it would be a support for the Dollar.
Obviously we have got some important data coming out as well, which will tend to be a risk for the Dollar. We have got non-farm payrolls coming out at the beginning of next month. If we do not see the Fed doing more QE today, we think that they will do more easing in the second half of this year and that would tend to weaken the Dollar. There are also the US fiscal policy issues, as there are automatic spending cuts that are coming in January 2013. We think that this fiscal issue will be dampening the US growth next year and this will have a longer term dampening effect on the Dollar.