US: Two factors hurting the dollar - Nomura


Bilal Hafeez, Research Analyst at Nomura, explains that as is often the case, markets move when it is least convenient and the dollar has tumbled since mid-December until now – a period when investors were more likely to be embroiled in family dramas and over-eating than to be trading FX markets.

Key Quotes

“Dollar weakness has come despite the passing of US tax cuts, an associated upgrade to US growth expectations and a hawkish Fed. There are many medium-term factors that we think are weighing on the dollar, but in terms of short-term factors, two stand out:

  • The dollar typically falls after a hike. Markets are all about expectations and it was likely the expectation of the December Fed hike that was helping the dollar. The actual hike, then, would naturally reset those expectations and would lead to a “buy the rumour, sell the fact” dynamic in the dollar. Indeed, the dollar has followed a pattern of trading relatively well into Fed hikes, but selling off after. This time appears to be no different.
  • Rising US inflation expectations could be hurting the dollar. Wednesday’s ISM report showed the prices paid component bouncing back from an earlier dip. Oil prices are marching higher. Importantly, US inflation expectations as priced by US rates markets have consistently risen since early December. The 10yr breakeven from the TIPS market breached 2% in recent days – the first time since early 2017, and the 5y5y inflation swap inflation breakeven has gone above 2.35%. The dollar does not always move with inflation expectations (notably during the” Trumpflation” phase), but typically it does. Some of this co-movement could be the dollar influencing inflation expectations, but some could be inflation affecting the dollar (through PPP, real yields or “credibility”). Either way, inflation could be returning as a market factor.”

“Of course, the start of the year is a period when market liquidity is poor. Therefore, we need to be cautious in extrapolating too much from price action, but these two factors do warrant some attention.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Recommended content


Recommended content

Editors’ Picks

AUD/USD: Gains appear capped above 0.6700

AUD/USD: Gains appear capped above 0.6700

AUD/USD came under heavy downside pressure on Wednesday, retreating for the third session in a row in response to extra gains in the US Dollar, while renewed weakness in the commodity galaxy also collaborated with the steep decline.

AUD/USD News

EUR/USD opens the door to a test of 1.0800

EUR/USD opens the door to a test of 1.0800

The continuation of the buying pressure in the Greenback maintained the price action around EUR/USD depressed on Wednesday, motivating the pair to recede to multi-day lows in the 1.0820–1.0855 band.

EUR/USD News

Gold plummets amid Harmony Gold news

Gold plummets amid Harmony Gold news

Gold price turned south and extended its slide after breaking below the key $2,400 level. The 10-year US Treasury bond yield holds steady above 4.4% and the US Dollar benefits from the negative shift seen in risk sentiment ahead of FOMC Minutes, not allowing XAU/USD to rebound.

Gold News

White House and SEC Chair condemns crypto bill that seeks to dodge the regulator’s oversight

White House and SEC Chair condemns crypto bill that seeks to dodge the regulator’s oversight

US Securities & Exchange Commission (SEC) Chair Gary Gensler expressed concerns about the potential impact of the FIT21 bill on investor protection in a statement on Wednesday.

Read more

UK election confirmed for July, what it means for markets

UK election confirmed for July, what it means for markets

The UK will head to the polls on July 4th. This election has been expected for some time, so it is no wonder that UK asset prices have been remarkably stable on the back of this news. GBP/USD has given back some earlier gains, but it is still higher on the day.

Read more

Forex MAJORS

Cryptocurrencies

Signatures