US Dollar Attracts Investors as Global Market Mood Improves

US DOLLAR, FED, INTEREST RATES – Talking Points:

• US Dollar rose despite Fed rate cuts on haven demand in 2019
• Capital flows seek returns as global investors’ spirits brighten
• Yield premium makes USD attractive vs. leading to FX majors

Where will markets end 2019? See our Q4 forecasts for currencies, commodities and stock indexes !

The US Dollar has marched conspicuously higher despite a dramatically dovish shift in Fed monetary policy in 2019. The start of a downturn in global economic growth drove the Greenback upward even as it inspired expectations of a rate cut cycle.

The leading global reserve currency offers unrivaled liquidity, which means it isrelatively less volatile when large capital flows move in and out. That makes it understandably attractive as investors try to avoid erratic price moves while cashing out of riskier assets amid a downturn.

Chart created with TradingView

US DOLLAR CHANGING FROM HAVEN TO CARRY CURRENCY AGAIN

As the year winds down, a sense of optimism has emerged. The 2020 policy outlook implied in Fed Funds futures has tellingly turned away from dovish extremes observed toward the end of the third quarter, with traders now questioning whether even one more rate cut is in the cards.

Fed Chair Jerome Powell echoed the market mood at the presser following October’s FOMC meeting. He said risks to the outlook have moved in a positive direction, citing a strong household sector, improved trade policy developments and a “materially” lower chance of a no-deal Brexit.

USD initially fell as investors’ spirits brightened, seemingly shedding some support from anti-risk demand. The pullback has tellingly stalled however even as expectations grow rosier. Zooming in for a closer look, price action seems to have recoupled with the Dollar’s yield spread against top counterparts.

Chart created with TradingView

This makes sense. Recent rate cuts notwithstanding, the US still enjoys a near term (two-year) return premium of close to 1.5 percent against leading alternatives. If risks to global growth are receding and policy easing is all but done, a renewed focus on yield-seeking ought to make USD attractive.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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