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Categorized | Currencies

Dollar juggernaut still rolling on: Strongest in nearly 14 years

Posted on November 24, 2016

You know what they say: Buy dollars, wear diamonds.

The buck is not backing down, with the dollar index, which tracks its value against a basket of other major currencies, now up at its strongest level since March 2003.

Compared to some selected other currencies:

  • The euro is down at $1.0550, having earlier hit $1.0515, its lowest since early 2015.
  • The buck shot up to Y113.53 against the yen, having carves out a rise of over 2 per cent just since yesterday.
  • In EM, a key victim is Turkey, fittingly for Thanksgiving. With a Turkish rates decision coming up later, the dollar is up at an eye-watering TRY3.4136, a record low for the lira (again).

Kit Juckes at SocGen is feeling whimsical as he explains the shift:

The Pied Piper of Hamelin lured away the rats that plagued the town and when he wasn’t paid he lured away the children too. The bondland piper is luring away most of the world’s currencies to lower and lower levels against the dollar….

A strongish durable goods orders release, and a perception that easier fiscal policy is coming all over the world are cited as the catalysts for yesterday’s lurch higher in Treasury yields, but the underlying cause is that after 10-year yields halved between the end of 2013 and mid-2016, there were a lot of longs which are still being flushed out. Positioning isn’t going to stand in the way of bond prices falling which in turn is the fuel for the dollar’s advance.

The dollar index is testing 102, a level last seen in March 2003, and we expect a further 6% rise over the next few months. In broader trade-weighted term, the dollar is now within 2% of the 2002 peak which seems sure to break in the coming days, taking the dollar back to levels not seen since 1986.

To the extent that bonds are in control here, Morgan Stanley thinks flaky market conditions could be playing a role:

The dollar has further upside potential from here, gathering support from sharply widening interest rate and yield differentials.

Over the past couple of weeks, the rise in real yields has put high-yielding FX under selling pressure. However, the real yield increase has been due to ‘technicals’ more than anything else. Regulated banks with now-downsized trading books no longer act as a buffer within markets in liquidation mode. The discrepancy between global debt-related security holdings and market liquidity is wide, suggesting the possibility of a wave of bond liquidation leading to higher real yields. Certainly, a liquidation-related rise in real yields is a risk, but we doubt that real rates rising too much would be in the Fed’s interest.

(Chart: Bloomberg.)