The past couple of days the US $ is bouncing, up more than 1% so far. At 75.85 this afternoon, if the US dollar index can close through 76.10 over the next little while that would be significant.
Meanwhile the risk trade is taking a much deserved kick in the teeth:
Dec. 4 (Bloomberg) — “The biggest rally in the U.S. dollar since June snuffed out an advance in commodities and equities as an unexpected drop in the unemployment rate triggered bets the Federal Reserve will lift borrowing costs. Gold slid the most in a year and two-year Treasuries tumbled.” See: Dollar rally erases gains in commodities, US stocks after jobs.
The main risk building for investors the past few months has been precisely this: emerging markets, commodities, gold, equities, high-yield debt, have all rallied violently courtesy of the US carry trade extenuating the falling Greenback.
Whether its bad news of geo-political concerns driving a flight to safety, or good news in a better-than-expected US jobs report this morning, both extremes threaten to buoy up the much maligned dollar just as the masses are so confident of its demise.
If we are started into a true economic recovery then we should expect government intervention to pull back and interest rates to begin their long trend up. This is likely to support the U dollar. If the recovery is not taking hold and 2010 continues to disappoint recent hopes, this too is likely to support the dollar. Interesting times…
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Reading ECRI religiously every week all this came with no surprise.
I think going against US 30 year Treasuries is a wise move right now, since US inflation pressures also started simmering.
First rate hike? in March 2010 if Ben does not want to stay behind a curve, but probably he will.
Hi Danielle,
In the time leading to the March 2009 lows, the US$ appreciated against most major currencies and US Government bond rates fell to record lows. This time (if this being the beginning of another 'risk aversion' period in the market) the US$ and bond rates seems to be heading in different directions, with the US$ rising and bond yield rising as well.
What do you think is the direction of bond rates in the coming months?
Thanks.
good question. If risk aversion resumes in earnest, I would expect that government bonds will be bought and rally with the U$, which would mean lower yields for a while. The competing force would be large new bond issues flooding on to the market threatening to drive prices down, but it seems there is still, so far at least, good appetite for gov't bonds. I suspect that a rebounding U$ will only increase bond appetite for foreigners. Safety of principle and currency appreciation are pretty attractive in this climate.