The Real Story Behind the U.S. Dollar's Decline
This article by Luke Kawa Bloomberg may be of interest to subscribers. Here is a section:
The return of real yields as a driver of the greenback is a consequence of the long period of zero and negative interest rate policy across the major G3 central banks.
"What’s important now is that with rates so low, there’s more information in long-term than short-term rates, and real rates matter more because nominal ones can’t move that much," the strategist wrote in an email. "Inflation expectations can move more."
An extended span of central bank stimulus has left short term nominal rates especially sticky relative to longer-term real rates, asserts Juckes.
Even in the aftermath of liftoff from the Federal Reserve, U.S. real rates have been collapsing—a trend that explains the drop-off in the U.S. dollar spot index (DXY) over the past three months:
This decline has left the U.S. dollar index "perilously close to key technical support," says Juckes, which if breached, will effectively constitute a bear market for the greenback.
For the greenback to find its wings once again, other central banks will need to find a way to put more downward pressure on real rates in their respective economies, according to the strategist.
"What it means: the Fed is not the dollar’s friend," concludes Juckes. "A stronger dollar only comes when others get their real rates/yields lower, and over the last three months, U.S. real yields have fallen by more than in other major economies and indeed, Japanese real yields have risen."
The actions of the Bank of Japan in not meeting the market’s expectations for additional stimulus have unleashed a powerful short covering rally in the Yen. The Dollar has held a progression of lower rally highs since June last year and an increasingly short-term oversold condition relative to the trend mean is evident. A break in that sequence will however be required to question medium-term scope for additional Dollar weakness.
This outsized move has exerted a negative influence on the Dollar Index which is now testing the August low near 92. While the Dollar is short-term oversold a clear upward dynamic will be required to confirm support in this area.
The Euro is now back testing the upper side of the more than yearlong base formation and closed at a new high today. A clear downward dynamic will be required to question potential for additional upside.
