Friday was a very different day for currency trading. The stock market rose on good news in the US but the dollar also appreciated. This has not been the pattern that we have usually seen over the last few months. Generally, when there has been a stock market increase the dollar has fallen as money moved out of the safe haven of the dollar and into riskier currencies.
Now there can be a compelling story for a dollar rise given the stronger increase in economic growth. The US could be a more compelling place for direct investment which would be dollar positive. The dollar could also be a better place on a relative basis versus the EU or Japan. This has not be the story followed by the market but a change could be taking place. Certainly fixed income is signaling higher yields which could be caused by a expectations of a growth rise and an end of the easing cycle. There is some talk of an end to the easing cycle during the first quarter of 2010.
We are not convinced that we have evolved to a new dollar - US equity relationship but we view that the buying of equities will continue with gains on any news that looks positive. Emerging market equities have gotten way ahead of advanced economies in the last few months so the knee-jerk reaction to risk seeking may slow.
Now there can be a compelling story for a dollar rise given the stronger increase in economic growth. The US could be a more compelling place for direct investment which would be dollar positive. The dollar could also be a better place on a relative basis versus the EU or Japan. This has not be the story followed by the market but a change could be taking place. Certainly fixed income is signaling higher yields which could be caused by a expectations of a growth rise and an end of the easing cycle. There is some talk of an end to the easing cycle during the first quarter of 2010.
We are not convinced that we have evolved to a new dollar - US equity relationship but we view that the buying of equities will continue with gains on any news that looks positive. Emerging market equities have gotten way ahead of advanced economies in the last few months so the knee-jerk reaction to risk seeking may slow.
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