DailyFX
Dollar Rallies Despite Blow Out S&P 500 Drive, Be Careful
John Kicklighter

  • Dollar Rallies Despite Blow Out S&P 500 Drive, Be Careful

  • Euro Readies for the Economic Bill with 1Q GDP Data on Deck

  • Australian Dollar: Down 7 Straight Days - Overextended or Building Momentum?

  • Japanese Yen Facing 1Q GDP but Will it Turn the Currency’s Run?

  • British Pound Exposed to Volatility on Labor Data, European GDP

  • Swiss Franc May Permanently Change its Safe Haven Status

  • Gold Down a Fourth Day, Dollar’s Stimulus Bearings Key

Dollar Rallies Despite Blow Out S&P 500 Drive, Be Careful

We’ve close yet another incredible day for the S&P 500…and the US dollar. Both benchmarks for risk appetite and safe haven put in for an aggressive push to fresh highs. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the tally is now up to four consecutive days of climb with consistent closes at near-three year highs. For the Fed-supported equity index, the 1.0 percent rally to 1,650 was a sharp extension to record highs. At this point, the both currency and stock index are pulling away from conventional risk-based measures. While the S&P 500 finds itself severely removed from record low, global benchmark rates; the balance between return and risk hasn’t materially declined in recent days and weeks to justify the astonishing move the reserve currency has put in. Once again, we are reminded that the environment for sentiment hasn’t fundamental changed – rather the standard ‘risk on / risk off’ theme simply isn’t driving the boat. It’s stimulus.

Investor sentiment is a global theme. While the Federal Reserve was one of the first central banks to move aggressively to expand its stimulus regime aggressively, it isn’t the only one. As the Bank of Japan commits to an active – and massive – stimulus program, the European Central Bank moves towards an open-ended regime and Bank of England is seen diving into the pool when new leadership comes in July; there is artificial support around the globe. That can keep fear of capital market reversals and credit troubles down even as discussion of the Fed’s first steps of bowing out of the game gain traction. Funds that reflect investors’ interest in Treasuries and mortgage-backed securities (MBS) – assets that the central bank buys and savvy traders frontrun – have dropped sharply the past two weeks. This is a boon for the dollar while risk is slow to respond. However, risk appetite will not hold if QE3 has passed its peak. And, risk aversion would be another dollar booster.

Euro Readies for the Economic Bill with 1Q GDP Data on Deck

Finance Ministers in the Euro-area meet for the second day with the entire EU group discussing the health of the financial system and economy. Similar to Monday’s meeting with just the policy makers using the euro, the conversation was tailored to words of optimism and calls for action. Events like these are meant to encourage confidence, so the commentary should surprise no one. However, when we know what to expect; it is easier to spot the unusual developments. Notably, most of the key policy officials in the group made mention of a similar hot topic: the ‘bail in’. Raiding deposits as a means to stabilize a country’s banking system, this has become a popular term since the program was employed to save Cyprus from a very troubled fate. What is concerning though is that the reassurances were not that the unusual policy was a one-off, but rather that they wouldn’t look to tap accounts smaller than €100,000 in the future. Demand for uninsured accounts is market confidence territory…

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