Although the euro’s decline below 1.30 is attracting much of the attention in FX markets today, it is actually the continuing surge in the dollar which ought to be generating just as much interest. The dollar index has jumped to 80.5 this morning, not that far from the high for the year recorded in the first few days of January. Since the end of October, the dollar index is up by more than 7%, a very significant move for the world’s major reserve currency.
Dollar demand over the past couple of months has been very pronounced for a number of different reasons. First, both investors and traders have been rushing to divert some of their euro exposure into the greenback fearing Europe’s sovereign debt and banking crisis could actually result in the demise of the single currency and/or many of Europe’s largest banks. Second, financial markets in Europe have completely seized up, making it exceedingly difficult for banks and companies to obtain funding. As a result, they have been forced to get funding in other currencies, principally the dollar. Third, the US dollar is benefitting from the improving economic fortunes being enjoyed in America, which contrast sharply with those of Europe where most economies are either already in or are directly heading for recession, and in Asia where growth is also slowing. Overnight, the Fed actually upgraded its economic forecast. As if to emphasise just how strong dollar demand is right now, yesterday’s 10yr note auction generated a bid/cover of 3.53 times, a very decent outcome.
To be clear, the dollar is not just benefitting from euro-abandonment. The gold price has collapsed by another USD 100 this week as investors reduce their safe-haven bets on the precious metal in favour of the greenback. High-beta currencies such as the Aussie are suffering as well, with parity breached overnight.
It is little wonder the dollar is in such high demand. As we have been suggesting recently, these themes supporting the dollar could run on for some time to come.
