US Dollar at Record Lows against Euro on Stock Market Rallies: Dollar Unlikely to Post Worthwhile Rebound

The euro showed little hesitation in setting fresh record-highs of $1.4437 through earlier London trade, while the British pound fell just shy of 26-year highs near $2.0657. The Canadian dollar likewise surged against its US namesake; the loonie now trades at incredible heights of C$0.9530 against the dollar. Yet the downtrodden greenback remained resilient against the similarly oversold Japanese Yen. Strong rallies in world equity markets pushed the US dollar 0.40 yen higher to 114.66.

Limited economic event risk forced forex speculators to trade off of broader risk sentiment—leaving the US dollar lower and the currency carry trade substantively higher. World commodity prices subsequently soared on greenback weakness, and the NYMEX West Texas Intermediate crude oil contract set a fresh record-high of $93.20. Such a move unsurprisingly coincided with the USDCAD at new depths. Though the correlation between oil and the Canadian dollar has weakened through past months of trade, it remains relatively clear that strong crude prices will push the loonie higher against its US namesake. Growing geopolitical tensions have been a main driver of oil price strength, but it likewise seems clear that the dollar-denominated commodity will depend on further greenback weakness to continue its ascent. 

The US currency’s continued sell-off suggests that markets remain little-concerned ahead of critical domestic economic event risk on the week. Volatility is likely to surge on Wednesday’s highly-anticipated US Federal Reserve interest rate announcement, while later-week Non Farm Payrolls data also promises strong price movements.

The Dow Jones Industrial Average continued to recover from recent depths, rallying a modest 42 points to 13,849. Tech stocks likewise improved on previous performance, and the NASDAQ Composite gained a similar 0.3 percent to 2,813. The broader S&P 500 index was the worst performer of the three, however, as the highly-diversified index only managed a 4 point gain to 1,539. 

A modest improvement in broad risk sentiment pushed short-dated Treasury Bond yields higher, with the 2-year note adding two basis points to 3.79 percent. The small gain in yields coincided with decreased expectations that the Federal Reserve would cut interest rates through Wednesday’s meeting. Fed funds futures contracts show an implied 96 percent chance that the FOMC will cut rates by 25bp. Though sentiment overwhelmingly favors further monetary policy easing, it is worthy to note that speculators priced in a 100 percent likelihood of the same outcome just several days ago.

Written by David Rodríguez, Currency Analyst for DailyFX.com