The USD is HOT! What Gives?

The USD is HOT so what gives?  It rallied in 2012 but has gone nuclear in 2013.

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Weisenthal goes on to say:

Here’s a chart of the trade-weighted dollar index.

 

So what gives?…[According to] Morgan  Stanley FX  Pulse the basic gist is…[that] it’s about

• weakening yen,
• strengthening data,
• increasing US yields relative to the rest of the world (which makes the dollar inherently  more valuable),
• weakening euro, and
• more hawkish tones from Fed folks.

Here’s the commentary from Morgan Stanley:

“There has been a significant shift in global  currency market dynamics over the course of the past week, driven not only by  the JPY, but increasingly by the USD. We have discussed recently the potential  change in the status of USD, with the US increasingly being seen as an  investment destination and the USD being used less as a funding currency.

This process has continued over the past week,  with further strong data from the US leading to a renewed rise in US treasury  yields. This rise in US yields now places the USD into the basket of yielding  currencies, which suggest further support is likely to build over the over  medium term.

The US data has continued to provide positive  signals for the USD, with the renewed improvements in the labour market data of  importance, given the Fed’s policy link to the unemployment rate. But, the  positive news is broadening beyond the labour market, with a favorable impact on  the US consumer also starting to become evident, while our US economists now  see US Q2 GDP tracking at 1.8% instead of 1.2%

The encouraging news from the labour market and  elsewhere in the US economy has added to the USD support, especially as the  tapering debate is intensifying once again. Indeed, most of the Fed speakers  over the past week have been from the more hawkish camp, which has allowed the  rise in yields to go unchecked, thus far. The Fed’s Plosser, although not a FOMC  voter currently and a known hawk, has led the calls for tapering over the  past week. Hence, we place emphasis on Fed chairman Bernanke’s response (next  speech due Saturday). If Bernanke decides to address the rise in yields this  could cause a pause in the USD recovery, but we would view this as likely to be  very brief, providing a renewed USD buying opportunity, especially given the  overall more positive signs of growth coming from the US  economy.

[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.businessinsider.com/us-dollar-strength-2013-5#ixzz2TZ6NQENm

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