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.”

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.

Feed news

Latest Forex News

Editors’ Picks

EUR/USD stabilizes above 1.10 amid trade pessimism

EUR/USD is trading above 1.10, stabilizing after falling on Friday. President Trump has expressed pessimism about reaching a deal with China.


GBP/USD runs through 1.2850 on Brexit hopes

GBP/USD is trading at daily highs above 1.2860 price zone, despite UK GDP missed expectations with an increase of only 0.3% QoQ. Comments from UK's Javid saying "fundamentals strong," and other's from Nigel Farage, supporting Conservatives, underpinned Pound.    


USD/JPY trims losses, rises back above 109.00

The USD/JPY pair trimmed losses over the last hours amid a recovery of the US dollar and despite the decline in equity prices in Wall Street.


Gold rebounds from multi-month lows, trades around $1,455

After posting its largest weekly percentage drop of the year and erasing more than $50, the troy ounce of the precious metal remained under pressure on Monday with the XAU/USD pair slumping to its lowest level since early August at $1,452.

Gold News

Central bankers link the future to blockchain projects

The race towards the tokenization of sovereign currencies has begun a long time ago, but it finally enjoying its time in the sun. China has announced its intention to create an e-Yuan, and also in Europe, institutions are considering the matter.

Read more