Conditions have changed significantly since the G7 summit in Washington, DC produced coordinated intervention from global governments to reboot lending. LIBOR, the interest rate banks charge each other for overnight loans, has now fallen to the lowest level in over 4 years. The Ted spread*, a common measure of default risk, is down a whopping 35.69% since peaking just 10 days ago.
* The price spread between 3-month US Treasuries and equivalent term USD-denominated overseas deposits.
Overnight LIBOR Rate:
Source: Bloomberg
Ted Spread:
Source: Bloomberg
This has seen a breakdown in the dollar's relationship with risk-free assets, with the EURUSD / Long bond inverse correlation down to -65%. Meanwhile, the EURUSD has become increasingly correlated with the MSCI Index of global stock performance. Amazingly, that correlation now stands at an impressive 85%.
EURUSD Exchange Rate vs. MSCI World Stock Performance Index:
Source: Bloomberg
Bottom line, all this suggest that the US dollar should lose value in the near term as traders pull capital out of safe-haven assets (cash, bonds) and put it back into stock markets. The technical outlookt is supportive, with an index of the greenback's value against six major currencies positioned squarely at resistance below the upper boundary of channel established in mid-June.
US Dollar Index:
Source: FX Trek IntelliCharts - Prepared by Ilya Spivak
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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