The US stock market has been a strong ride since February and has come off its lows since the middle of June. The latest gains have been a response to the economic data that shows a more robust manufacturing sector and controlled inflation. Given this information, the expectation would be that the dollar should strengthen. The higher equity prices should lead to larger capital flows into the United States. The higher growth and lower inflation also should be good for the dollar.
Currently, that is not the case. While limited value should be taken in any one days activity, the dollar is at lows versus a number of currencies. This may have made more sense during a period of slower growth and rising inflation, but not as much during a periods of rising economic activity. Granted the reversal of gloom in February lead to some dollar strengthening but we are now at a point that the Euro is near highs.
Currency markets at this time are driven by carry and what monetary authorities may do. A good growth scenario with limited inflation means the Fed may be on hold for a long-time. This means there will be no gain from holding US fixed income. With other central banks increasing rates, the carry demand is still strong for holding money assets in other countries. This style bias will have to change before we see dollar strengthening
No comments:
Post a Comment