DailyFX
Forex: Dollar Traders Tense as Risk Coiled, Fed Taking Steps
John Kicklighter

Talking Points:

  • Dollar Traders Tense as Risk Coiled, Fed Taking Steps

  • Euro Growth Outlook Firm but Downside Risks Highlighted

  • Yen Crosses Working a Day Closer to Breakout

Dollar Traders Tense as Risk Coiled, Fed Taking Steps

The tension in the markets is palpable. The likelihood of a high-profile S&P 500 breakout to record highs is growing, and with it the assumptions for risk appetite follow. That is a dangerous equation for the already stricken US dollar. Though the currency’s relationship to the favored ‘risk’ benchmark has diminished over the past year or so, periods of volatility tend to sync the two on opposite ends of the risk spectrum– and thereby opposite ends of the performance tables. A move above 1,850 for the equity index is not the variable FX traders are necessarily concerned with however. Rather, the concern is whether such a move would necessarily represent or encourage a genuine underlying sentiment run. The S&P 500 is just a thermometer for the balance between demand for return and safety – and it is a faulty one at that.

In measuring the heft and momentum behind risk trends, it is important to establish how broad and intense the perspective is. If the eagerness for return were truly robust, we would expect to see global equities, Yen crosses and Emerging Markets rise with gusto in concert. The escalation in risk exposure would need to be significant though for the dollar to resolve itself to a discarded safe haven. Yet, where would a sudden and enduring appetite for further exposure come from? The docket ahead is light for market-moving events/data, and growth forecasts have diminished. Furthermore, there is little scope for a ‘rebound’ when we are at or near highs and volatility measures show there is little discount to work off. So, beyond a few technical breaks, speculators will need to find their inspiration elsewhere.

While we await the appraisal on sentiment, dollar traders are also taking note of some Fed movement. This past session, the FOMC released its discount rate meeting minutes which noted optimism for the economic outlook and a repeat vote from the directors of the Kansas City, Philadelphia and Dallas Fed branches for a hike in the rate to 1.00 percent. Though the hawks were overruled, the pressure remains. Receiving less press, the Fed had also announced an increase to its overnight repo rate from 4 to 5 bps. While this is an experimental facility now, it has been used heavily as of late, and will likely bridge the gap between the end of QE3 and the eventual rate hikes.

Euro Growth Outlook Firm but Downside Risks Highlighted

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