Is This a Weak Dollar or Strong Euro, Pound and Canadian Dollar?
- The Dollar has extended its decline this week, but the fundamentals now and these past months haven't faltered
- While the US fundamentals may not be significantly weakening, its counterparts' have seen significant improvement
- Where growth and politics enter into the equation, the true bane for the Dollar is a rebalancing in monetary policy
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All boats run aground when the tide rolls out. In the markets, the performance of any individual asset or sector is dictated by the surrounding conditions. That can mean liquidity and volatility that promotes range rather than prevailing trend - which has generally been the case for some time. However, that can also manifest in relative influence. We frequently see the impact that a strong Dollar can have on capital markets from Gold to equities to fixed income when the Greenback has been charged by monetary policy or other factors. There is an even more distinct and comprehensive relative value evaluation to be found in the currency market. Here, again, the US currency factors in prominently as the most liquid fiat and most heavily used reserve. However, it isn't always the biggest player muscling its smallest peers.
While the Dollar can exact a greater degree of influence when under power, like any market, it goes through periods where it is essentially left to drift - as is the case currently. In such conditions, an extreme move in a single major counterpart or a more moderate collective shift for a range peers can leverage a reaction from the benchmark. That was the case Dollar this past session. While the DXY Dollar Index dove towards a critical, technical support; the motivation was distinctly absent from the US newswires. There are certainly themes unfolding behind the scenes at a measured pace; but that hardly justifies the intensity of this week's tumble. Strong - and fundamentally-motivated - rallies for the Euro, Pound and Canadian Dollar offered enough collective pressure to subvert their largest counterpart.
From the Euro, traders seized on otherwise begin rhetoric from the ECB President to extrapolate loose expectations for a reversal in the central bank's aggressive stimulus effort. While the group tried to squash that speculation, the interpretation nevertheless stuck. Meanwhile, Governors from both the Bank of England and the Bank of Canada offered less ambiguous statements of willingness to pursue hikes should economic conditions support the decision. Individually, the moves generated through EUR/USD, GBP/USD and USD/CAD would not have translated into a substantial move for the Dollar. Yet, collectively, these three currencies represent over 90 percent of the exchange with the Greenback. That is more than enough to move the needle. Recognizing the indirect motivation for the recent big move, the next question that naturally follows is: can this tumble sustain itself. If the move to this point required this degree of breadth and depth, it would be difficult keep all the factors in alignment. That is especially true in current market conditions were to remain firmly in neutral. We discuss the influence of a currency or market's peers for establishing direction and intensity in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.