USD: Conflicting signals – Rabobank

The turmoil that rocked equity markets earlier in the month was triggered by a spike in inflationary concerns and the prospect of a sharper increase in US rates played on anxieties about USD liquidity and led to a pick up in the value of the greenback, according to Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“Even though bond yields have remained at higher levels, the DXY dollar index has subsequently given back these gains and dropped to 38 month lows vs. the EUR and to 15 mth lows vs. the JPY.  Although higher interest rates are generally a supportive influence for currency markets, the USD is being undermined by a rise in concern about US fiscal discipline.  We expect that the coming weeks and months could be a volatile period for the USD as the market attempts to reconcile conflicting influences.  We are of the view that the USD will be able to gain ground against a number of high yielding currencies over the medium-term.  However, we expect that the strength of Eurozone fundamentals will mean that EUR/USD remains well supported.” 

“In the years that followed the global financial crisis, the theme of fiscal discipline tied the hands of governments throughout the G10.  This has helped contain budget deficits.  In 2017 Eurozone economic growth was the fastest in a decade. The impact of stronger growth alongside fiscal restraint has allowed the budget deficit to GDP ratios in many developed economy to reflect a picture of improved health.  These include the previously crisis riddled economies within the Eurozone.  Portugal’s budget deficit dropped to just 2% of GDP last year, Ireland’s to just 0.3% of GDP and even Greece managed to exceed the primary surplus target it had set for 2017.  By contrast the fiscal outlook for the US has been moving in the opposite direction.”