Dollar weakness in context

Summary

International trade, politics and a roiling technology sector are putting the dollar’s recent softness into context.

International trade, politics and a roiling technology sector are putting the dollar’s recent softness into context. The greenback was lightly bid in the context of the Dollar Index by Europe’s mid-morning as it rose sharply against the Aussie and moderately vs. Nordic currencies and euro (after a new two-week high) and loonie. Sterling gains within its tight ‘Brexit deal range’. Upticks in the franc and yen give the game away. The slight greenback advantage is aligned with dwindling risk appetite as the dollar’s recent pattern of safety appeal comes to the fore. There are few creditable interpretations in terms of risk appetite or underlying currency support. The Dollar Index has yet to corroborate the false break thesis after slicing through and potentially invalidating rising trendline support that underpinned its advance since September. The gauge is perched on a horizontal support around 96.15 (established most obviously in August and earlier this month). Oscillators in the daily view suggest increased buying could resume in the near term. But after DXY fell at the second fastest rate of the month, last Friday, the chart also portrays a loss of confidence that is unlikely to return easily or be as pristine if it does.

The preeminent trigger was the handful Federal Reserve policymakers breaking ranks to note signs of a global slowdown might be more salient than it earlier acknowledged. The comments appeared to crystalize pre-existing wariness that growth in key regions was already past peak. The market also attempts to factor possibly interconnected signs of weakening aggregate demand, in the wake of rising import duties, with the technology sector catching investors’ eye the most. In short, beyond safety demand, the dollar is beginning to look better integrated into the global considerations that have challenged appetite for riskier assets—mostly shares—outside of U.S. stock markets this year, causing most regions to underperform North American equity markets. If the cycle peak is indeed about to become more inclusive, we will have better indications of this in U.S. corporate and economic growth readings in early 2019. At some point, a weaker dollar should also be an interpreted as an easier dollar, alleviating funding conditions for weak current-account countries and credits. An early sign of this: U.S. 10-year Treasurys now yield roughly 3.05%, a 20 basis-point discount from 7½ peaks in October. Cheaper Treasury yields will also eventually aid sentiment on growth shares whose valuations became questionable amid hot market rates in recent months. This will not happen quickly though. For the remainder of the year, it looks like bears have arrived stateside to widen the more anxious sentiment that has prevailed more broadly for months.