Revenge of the dollar

Midyear FX outlook

Global currency markets continue to flounder in an environment of low volatility and volume despite being punctuated by periods of geopolitically induced risk events.

The ongoing Russia-Ukraine conflict remains a significant concern that was heightened by the Malaysian jetliner shot down by a missile in Ukrainian airspace in mid-July. Israel’s move into the Gaza strip to take out the source of missile attacks from Hamas has also heightened geopolitical tension. While distressing events such as these predictably prompt investors to charge into safe-haven assets such as the yen, gold, and U.S. Treasuries, financial market indifference to both long-running conflicts is such that risk-averse sentiment doesn’t last long.

The U.S. dollar’s performance (NYBOT:DXU4) has been mixed against a number of currencies in the first half of the year. The greenback gained broad support in July from the Federal Reserve’s monthly Beige Book that showed the U.S. economy is expanding at a moderate pace with consumer spending rising and manufacturing expanding. Questions abound over when the Fed will tighten interest rates, with hawkish members on the Federal Open Market Committee hinting at mid-2015.

In the U.K., economists remain puzzled over country's recovery. Investors expect the Bank of England (BoE) to raise interest rates before the calendar year is out. Meanwhile in the Eurozone, the European Central Bank (ECB) continues to grapple with propping up the currency bloc’s uneven economic turnaround.

Across the Asia-Pacific region, the yen remains the go-to safe-haven currency. Its support is strong despite economists’ weakening growth outlook for the unit based on the Shinzo Abe government’s controversial consumption tax hike implemented in Japan last April. China’s runaway real estate sector, meanwhile, is giving the world the jitters of late. The Australian economy is mired in doubt – China is Australia’s largest trading partner – while the Reserve Bank of Australia (RBA) governor gives the Aussie repeated tongue-lashings in an effort to talk the currency down.

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