Is Dollar Weakness About More Than Just Rates?

Is Dollar Weakness About More Than Just Rates?

Asia and the EU

EZ GDP -12.1%

North America Open

US PI/IS 8:30

Markets were subdued on the final days of the month with currencies flat across the board while equities saw little follow-through from the good news in FANG earnings.

With little newsflow in FX, currencies went into their usual summer stall last night keeping tight ranges in lackluster trade. The dollar strengthened mildly but it was nothing more than very tepid profit-taking, as investor sentiment continues to be very negative against the greenback.

The weakness in the dollar appears to be much more than just a mere interest rate compression story, though that is certainly the dominant fundamental factor aligned against the buck. With the 2-year at a mere 11 basis points and the benchmark 10-year sliding toward the psychologically key 50 basis point mark, income returns on dollar-denominated fixed income is shrinking by the day.

But this particular selloff may be political, as well as economic. With the US in a permanent state of turmoil, at loggerheads with most of its allies, as well at its adversaries, its global standing amongst the productive liberal democracies of the world is at an all time low, and investors may be losing faith in the strength of US credit. This is clearly one of the reasons why gold is rising, but it’s not alone. Bitcoin is in the midst of a stealth rally as well having crossed the 11,000 mark without much fanfare. The price action in alternative currencies suggests that the dollar troubles may just be commencing especially if the political rancor, pandemic hotspots, and a reversal in the economic rebound from Q2 lows all combine to create a highly volatile start to autumn.

So far, stocks have blissfully ignored the political problems in the US and yesterday’s banner earnings reports from most of the FANGS have validated the bull’s faith in the internet economy which dominates US indices. Stocks have managed to hold on to most of their post news reaction gains but have made no progress in the overnight session. The bulls will certainly try to push the indices higher with longs gunning for the key 11,000 level in the NASDAQ, as the month comes to a close, but with prices now reflecting all the good news we may be setting up for profit-taking day if the expected upside momentum does not materialize at the New York open.

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