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.

AUD/USD bulls regain control above 0.6950 amid USD retreat

AUD/USD regains traction and extends the previous day's bounce from the weekly low, aiming for 0.7000 in Asia on Friday. The overnight pullback in US bond yields keeps the US Dollar below an 18-month high, which in turn offers some support to the pair. Meanwhile, hawkish RBA expectations also keep the major underpinned.

USD/JPY holds gains near 158.00 after Japan's weak Household Spending data

USD/JPY clings to gains around 158.00 after data showed on Friday that Japan's Household Spending fell for the ninth straight month, undermining the Japanese Yen. Meanwhile, the US Dollar remains depressed as the overnight fall in US bond yields counters a hawkish Fed and geopolitical uncertainties, could cap any downside in the pair.

Gold remains range-bound below $4,200

Gold has given up some ground after an initial bullish attempt to reach weekly highs, returning to below the $4,200 mark per troy ounce on Friday. The US Dollar’s strong upside momentum, combined with rising US Treasury yields across the curve, seems to keep further gains in the yellow metal under scrutiny.

Has Bitcoin really escaped the macro forces it was built to fight?

Over 17 years ago, Satoshi Nakamoto designed Bitcoin (BTC) on the back of a global financial crisis as an alternative to the global monetary system outside the control of central banks, governments and traditional intermediaries. This raises a key question: has Bitcoin really become independent of the macroeconomic forces it was built to challenge?

The Euro is not the sick man of Europe. France's bond market is

EUR/USD remains under pressure, near the 17-month low of 1.1161 reached on Monday. The pair has lost more than 7% since its yearly peak, as concerns over France's public finances increasingly weigh on the single currency. But behind the weakness of the Euro (EUR), the problem does not necessarily lie with the European economy as a whole.