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Video: The Dollar May Not Rally Immediately with Risk Aversion

Video: The Dollar May Not Rally Immediately with Risk Aversion

John Kicklighter, Chief Strategist

Talking Points:

• The US Dollar is the FX market's most prominent 'haven' currency

• In periods where liquidity is the most important commodity to a market participant, USD is unsurpassed

• Yet, recently bolstered by rate forecasts, the Greenback can feel the pinch in the transition for risk

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In a bout of severe risk aversion where liquidity is prized above all else, the US Dollar will be a beacon in the FX market. However, in less severe conditions where all concern of return (yield) is not abandoned, the Dollar may actually suffer. We have already seen this unusual dynamic take shape over the past weeks where tentative risk aversion in traditional speculative-positioned assets like equities have found the Greenback an unexpected partner. This fundamentally-abnormal correlation between the Dollar and S&P 500 is the result of the former's strength over the past year, founded on growing rate expectations. Taking the mantle of the 'majors' leading interest rate candidate, there is premium that can see the currency drop in early phases of risk aversion. How strong is the Dollar's new relationship to risk trends and at what point would it revert to the liquidity bulwark? We discuss that 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.