Fundawrap: "why is the dollar so strong?"

Ross J Burland FXStreet

From a fundamental perspective, we need to ask the question "why is the dollar so strong?"

The dollar breached the 200-DMA (91.97) and rallied on to 92.50 within a range of between 91.7990-92.5660. The US yield, on the other hand, traded between 2.95%-2.98% and below the 3.00% mark. There was no real catalyst to the move, although, weighted heavily to the euro, EUR/USD was in freefall in Asia and European markets from 1.2080 down to 1.1981. This is more about a re-think over the reflation trade that is unwinding. There is less synchronisation in the global recovery, evident in the divergence between European countries and the USA. Traders have covered their EUR long positions due to the cost of carrying USD shorts.

Yield differentials have come back into vogue as the Trump administration manages to move through a number of key jobs on the "Things To Do List" that Trump was voted in for.

"Trump has gained traction with tax reform, trade policy, progress in Korea, and can claim credit for stronger economic momentum. A more assertive policy towards Syria and Iran may help improve Trump’s approval at home while increasing geopolitical uncertainty. It is too early for the market to be fretting about twin deficits. It needs to wait until there is a clearer picture of how Trump’s policies influence potential output, and the peak in US rates and yields are in sight," Greg Gibbs Founder, Analyst, & PM Amplifying Global FX Capital Pty Ltd argued.

Whether a peak in rates is in sight is arguable, (confidence in US/global recovery is still fragile, geopolitical risks simmer in the background), but for now, at least, the dollar is better bid on interest rate differentials. The market is still positioned long EUR/USD so there is still more unwinding to come if the crowd are going to lead and while hopes for the ECB tightening fades.

US shift Key headlines: (Source: LiveSquawk)

Boc's Poloz: becoming more confident that less stimulus needed over time
US Commerce Sec. Ross: White House won't keep extending tariff exemptions
Lighthizer: if NAFTA deal not made in 2-weeks, 'we're on thin ice'
Mexico says it will apply reciprocal measures to any us tariffs
Trump: details on North Korea summit to be disclosed soon
UK PM May expected to back EU 'customs partnership'
UK Brexit sec. Davis: huge payments to EU will continue for 'some years'

Author

Ross J Burland

FXStreet

Ross J Burland, born in England, UK, is a sportsman at heart. He played Rugby and Judo for his county, Kent and the South East of England Rugby team.

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