The greenback (NYBOT:DXH14) is broadly higher in the face of growing acceptance that the FOMC will further reduce its volume of bond purchases at its meeting next week. While the dollar has firmed against the single European currency (FOREX:EURUSD) and the Japanese yen (FOREX:USDJPY), it is marginally weaker against the British pound (FOREX:GBPUSD), which is still smarting from healthy retail sales data released just last week.
The link between a stronger economy and a rising dollar has been somewhat murky of late, not least because the data has on occasion been mixed. And while the December employment report was exceptionally weak, most accept that it does not reflect the underlying health of the U.S. economy, which is likely to have grown by almost 3% for the full year.
And the link has also broken in part because of the Fed’s ongoing message that “tapering is not tightening.” While the dollar has in part risen in reaction to strong economic data, the response often is muted. At the same time the transmission mechanism between rising bond yields and gains for the dollar also has fallen by the way side as the Fed’s message is assimilated.
A strong out-of-the-gate rally for stock markets in the U.S., in part backed by healthy moves in Asia and Europe, is hardly punishing Treasury note yields Tuesday. The yield on the 10-year U.S. Treasury note (CBOT:ZNH14) currently stands at 2.84% and is just a little higher on the day.
Equity market volatility, while remaining subdued as the market continues to plot new highs, refuses to rollover. The CBOE VIX index is higher by almost 5% at 13.05 as portfolio hedgers bid up option premiums at favorable levels for stock prices. This also may be helping the dollar. While most traders rarely can see around corners, rising implied volatility is a sign of growing fears that a stock market correction may be imminent. And of course while it may not be, the safe haven status of the dollar appears to be keeping its value bid at present.
The pound is slightly higher at $1.6461 (+30bps) while the euro is weaker by roughly the same amount buying fewer dollars at $1.3529. The dollar buys ¥104.33 as the Bank of Japan starts its two-day meeting.
Chart – Euro weaker as appetite for the dollar gains