The US dollar moves higher on risk reassessment
The mild dose of political reality being administered in Washington DC saw bullish stimulus bets reduced overnight. If financial markets needed any further confirmation that the US fiscal stimulus was the only game in town, the buy-everything herd received it overnight. Senate Republicans expressed disquiet over the size of the proposed USD1.9 trillion bill. That dose of reality was enough to send nervous investors away from equities and scurrying for the safety of US dollars. This sent the US dollar to modest gains across the board. The dollar index crept 0.17% higher to 90.39, moving it back to near the middle of its 90.00 to 91.00 two-week range.
That has left the major currencies consolidating at the lower end of their recent ranges versus the greenback. The overall chart picture is not convincing in either direction. A glance at the euro, yen, Australian, Canadian and New Zealand dollar charts shows markets in a holding pattern, and likely awaiting the FOMC press conference on Thursday morning Asia time.
With the PBOC keeping the yuan reasonably strong against the dollar around 6.4800, any stimulus nerves fallout has been limited amongst Asian EM. Regionally, Asian currencies remain tied to the yuan event horizon, content to continue consolidating at the upper end of their three-month ranges.
All of this could change if the FOMC creates a mini taper-tantrum on Thursday morning Asian time. If Fed Chair Powell doesn’t put the tapering noise to bed, the taper-tantrum could trigger a resumption in gains for the US dollar. Conversely, the Fed could stay firmly on message, US stimulus progress could well progress, and it would be business as usual. For now, though, it is hurry up and wait.
There are two games in town – the FOMC meeting and the US stimulus plan. Both are market-movers that warrant our close attention, as they could well have a significant impact on the direction of the dollar this week.