FOREX: Dollar may have Lost its Euro Driver





The dollar is doing more than taking a mere break. The benchmark currency may have been knocked off its bullish path. With the euro finding a tangible level of stability and risk appetite trends failing to play to the dollar’s role as a ‘safe haven’ currency, the fundamental drive is sputtering. This does not mean that a full-on selling effort is inevitable; but it does significantly reduce the probability that the greenback will quickly revive the recovery effort that it launched at the beginning of November. Assessing the dollar’s performance, Friday’s close produced the third consecutive decline and subsequently marked the first weekly loss in four. More specifically, the tumble through the final 24 hour period was the sharpest since October 20th. And, this wasn’t the most the most discouraging development for the currency. Far more troublesome is the reality that the dollar plunged against high risk (fundamental and yield-based labels) and fellow safe havens alike. The fact that EURUSD plunged 1.6 percent and AUDUSD rallied an equivalent distance is not as remarkable as the more balanced USDJPY suffering its biggest dive (2.2 percent) since May 20th while USDCHF endured its worst decline (1.9 percent) going back to May 8th of last year.

When selling pressure was levied on the dollar Wednesday and Thursday, both USDJPY and USDCHF would buck the trend and hold up remarkably well. What changed to migration away from the benchmark? Momentum was a key component in this equation. As the flow through EURUSD and other benchmark pairs increased, the spillover would naturally impact the more ‘resilient’ pairs. That said, the true turning point here was simply capitulation amongst currency traders. Fundamentally, the dollar is a naturally weak currency due to the global progress towards diversifying away from the uniform reserve currency and given the Federal Reserve’s consistent effort to increase the money supply through the Treasury purchases. Consequently, the dollar needs an active catalyst to keep it buoyant. And, since Wednesday, we have seen the dollar’s most potent support – euro selling – reverse course. Like the dollar’s rebound a month ago, the euro has marked its turning point around its central bank decision. The ECB did little to expand its official support of the region’s financial system; but there has been considerable talk that the central bank is buying up government debt to narrow yield spreads that symbolized the region’s financial troubles.

Moving forward, the greatest potential for fundamental influence still lies with risk appetite trends. Interestingly enough, the S&P 500 put in for its smallest advance in the three-day rally and subsequently fell short of marking a new two-year high. However, given the proximity to this psychological level, it would be particularly easy for the benchmark equity index to overtake the technical milestone and carry investor sentiment along with the way. This could have transpired to end this past week had the US employment statistics not dampened confidence. In a bigger-picture sense, the monthly nonfarm payrolls will do little to alter the health of the underlying economy. In fact, at this pace, it would take approximately 200,000 to 250,000 net additions each month for the next six years for employment to return to pre-crisis levels. Nonetheless, the NFPs report is an assumed catalyst for volatility; and so, the market fulfills expectations with a reaction. Thus, a 39,000 net increase that represents the biggest shortfall from expectations will curb an already hesitant sense of confidence.