Wednesday , 23 August 2017


U.S. Dollar Tied to Equity Market Movements

The USD remains on a steady downward path and is likely to continue to face a combination of both cyclical and structural negative forces. Words: 408

In further edited excerpts from his original article* Mitul Kotecha (www.econometer.org) goes on to say:

1. Cyclical pressure will come from:
a) the extremely easy monetary policy stance of the Fed
b) the ongoing improvement in risk appetite.

2. Structural pressure continues to come from:
a) the diversification of new FX reserve flows (mainly from Asian central banks)
b) concerns about the reserve value of the USD in the wake of massive US fiscal and monetary stimulus.

3. Risk aversion is no longer as correlated with the USD as it was a few months ago but there is no doubt that the USD is still highly sensitive to equity market movements.

4. Correlations between the USD index and the S&P 500 are consistently high (and negative) over 1M, 3M and 6M time periods. The relationship reveals just how closely the fortunes of the USD are tied to the gyrations in equity markets.

5. USD is likely to weaken further should, as is likely, the trend in earnings continue to beat forecasts which will push the dollar through key resistance levels.

The real test will come when the lofty expectations for economic recovery match the reality of only sub-par growth in the months ahead. In the meantime, the firmer tone to global equity markets may encourage capital outflows from the US into foreign markets by investors who had repatriated huge amounts of capital during the crisis. As risk appetite improves, the hunt for yield will intensify.

6. USD becoming the funding currency of choice for investors in place of the JPY also points to further pressure on the USD.

7. Timing of monetary policy reversal in the US will be crucial for the USD but it is highly unlikely that the Fed will hike rates next year.

8. Rate differentials are beginning to show a growing influence in driving currencies as the influence of risk appetite begins to wane.

9. Prospect of US interest rates remaining low for a long time does not bode well for the USD, at least until markets begin to price in higher US rates which is at least a few months away.

*http://www.fxstreet.com/fundamental/market-view/thoughts-on-the-global-economy-and-markets/2009-10-21.html

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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