Dollar Rebound Accelerates into a Rally as the S&P 500 Stalls, European Troubles Deepen The US dollar put in for its biggest rally in two weeks Wednesday; but this performance had little to do with US fundamentals. Once again, the world’s most liquid currency would benefit from shifts in underlying risk appetite trends along with a meaningful deterioration in confidence for its European counterparts. First, putting a floor under the dollar, the S&P 500 put in for a modest gain that kept the benchmark under the closely watched 1,300 figure (a level that acted as important support up until this past week). From there, we saw interest rate expectations behind the pound deteriorate significantly after the release of the BoE minutes; while confidence in the Euro Zone’s financial health (and an implicit preoccupation with an expected ECB rate hike) was shaken by a critical Portuguese budget vote. It was this specific counter-trend fundamental development that lead EURUSD and GBPUSD to sharp declines while AUDUSD and NZDUSD pushed higher and USDJPY held steady. Cross market flows will likely hold out as the greenback’s primary driver through the immediate future as there is only one thing that can genuinely alter the currency’s standing in the FX spectrum: a recovery in hawkish interest rate expectations. And, since that is slow to develop; we are dependent on speculators to react to risk trends and build up early forecasts of that inevitable first rate hike from the Fed. Speaking of that eventual shift in monetary policy, Fed Chairman Ben Bernanke offered little to compliment the early changes in approach with the government selling mortgage-backed bonds back to the market and allowances for banks to once again tap the capital markets for funding.

Source