The US dollar is little changed against the major currencies as yesterday’s moves are consolidated and traders wait for fresh developments. Global equities were higher after Wall Street’s advance yesterday. Asia-Pacific bond yields were firm, following the US lead, but European 10-year benchmark yields are lower, led by the continued rally in Greek bonds after an agreement was struck that will free up a tranche of aid.
The capital markets are off to a mixed start to start the last week of the month. Asian shares were mostly higher, though the Nikkei shed 0.5%. European shares are also higher, extending the three-week high seen last week.
The combination of stronger US economic data and signals from the Federal Reserve that it is looking to continue the normalization process helped the dollar extended its recovery. The dollar posted a significant technical reversal against many of the major currencies on May 3. The Dollar Index rose for its third week, as the greenback climbed against all the major currencies but sterling (+0.9%).
The US dollar is rising against all the major currencies today. The Australian dollar is retracing a sufficient part of its recent gains to suggest that the current phase of the US dollar’s recovery is not over. Given that the Aussie topped out a week before the other major currencies, it is reasonable that it begins recovering first. Its recent resilience was noted, but that has evaporated today, but a 0.8% drop by early European activity.
The most notable thing is not what has happened, but what has not happened. The market has not responded to the soft Chinese data over the weekend. Chinese equities began softer but recovered fully and the Shanghai Composite closed on its highs. The MSCI Asia Pacific Index is snapping a two-day losing streak with a 0.5% gain.
The International Monetary Fund (IMF) released a report on global corruption this week. In it, the international finance organization reported that almost $2 trillion worth of public works projects, permits for private work, and other transactions in countries around the world are tainted each year by bribery. That amounts to about 2% of the world’s total economic output.
The key issue facing the foreign exchange market is whether the modicum of strength the US dollar demonstrated last week is the beginning of a sustainable move. It is possible that the market is again at a juncture in which the price action will drive the narrative rather than the other way around. A move above JPY108 and a decline in the euro below $1.1350 signal a start to a broader dollar recovery that may have begun last week with impressive gains against the dollar-bloc.
The US dollar rose against all the major currencies last week. The importance of the price action does not lie with the magnitude or the breadth of the advance. Instead, the two takeaway technical observations are 1) the seemingly one-way market for euro and yen ended and 2) the dollar-bloc currencies appear to have put in at least a medium-term top.
The US dollar is firm, near the best levels of the week against the euro, yen, and sterling. However, against the dollar-bloc and several actively traded emerging market currencies, including the Turkish lira and South African rand, the greenback has given back some of yesterday’s gains.
Many may think that the United States or Europe, as the location of most of the world’s most developed nations, would be driving global economic growth. Asia, however, is actually the area driving global economic growth this year, according to the International Monetary Fund (IMF).
