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US Dollar & Volatility Swoon as Fed Achieves V-Shape Recovery

US Dollar & Volatility Swoon as Fed Achieves V-Shape Recovery

2020-06-03 21:30:00
Rich Dvorak, Analyst
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US DOLLAR INDEX CRUMBLES AS STOCKS SURGE & VOLATILITY PLUMMETS THANKS TO FED-FUELED MARKET RECOVERY

  • US Dollar selling pressure persists and drives the DXY Index to a fresh twelve-week low
  • VIX Index plunges into the 25-handle as investor risk appetite crushes volatility
  • Nasdaq pierces its all-time high as the stock market completes a V-shape recovery largely thanks to the Fed

The US Dollar has slid lower steadily over the last several trading session. US Dollar downside appears fueled by many fundamental forces, but unprecedented Fed action and the lasting wave of coronavirus optimism stand out as primary drivers.

Largely thanks to the FOMC backstop and coordinated measures by the Fed with other global central banks to ease USD funding pressure, trader sentiment has improved remarkably. Appetite for risk has flourished and demand for safe-haven assets has evaporated in turn.

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US DOLLAR & VIX INDEX PRICE CHART: 4-HOUR TIME FRAME (23 APRIL TO 03 JUN 2020)

US Dollar & Volatility Swoon as Fed Achieves V-Shape Recovery

Chart created by @RichDvorakFX with TradingView

Correspondingly, the broader DXY Index has crumbled to a fresh twelve-week low after plunging 2.5% on balance over the last eight trading sessions. Meanwhile, as improving market sentiment crushes volatility, the VIX Index, or ‘fear-gauge,’ has plummeted to its weakest level since February. Though the 40% surge recorded by the Nasdaq off its 23 March low, which catapulted the tech-heavy stock market index to its all-time high at the 9,700-price level, arguably stands out as most pronounced.

Read More – Russell 2000 Bests Nasdaq Rally, Bonds Plunge on ADP & PMI Data

As the US Dollar and VIX Index largely complete the retracement of their explosive move higher recorded earlier this year, and stocks broadly rebounding from the coronavirus-induced market panic mid-March, the Federal Reserve, championed by Fed Chair Powell, can now take a victory lap as the Nasdaq achieves its V-shape recovery.

DXY INDEX, NASDAQ COMPOSITE, SPOT AUD/USD PRICE CHART: DAILY TIME FRAME (30 DEC 2019 TO 03 JUN 2020)

US Dollar & Volatility Swoon as Fed Achieves V-Shape Recovery

Chart created by @RichDvorakFX with TradingView

That said, with bonds starting to bleed lower while the 10-year Treasury yield spikes above the 0.75% mark, there is potential for the broader US Dollar to start searching for a base after hemorrhaging against key peers. Further, the recent escalation in China tension still lingers as a major threat that could cause market sentiment to deteriorate and provide support to the US Dollar.

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There is also the outstanding risk that investor complacency exacerbated the latest move higher in stocks and lower in safe-haven currencies like the US Dollar. This could quickly unwind, and turn the ‘V-shape’ recovery into a ‘W-shape’ recovery, particularly seeing that stocks face peril as day of reckoning looms.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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