FB: Dollar Wilts As Eurozone Business Growth Picks Up
The greenback weakened against the euro on Tuesday after a spate of eurozone purchasing managers’ indexes (PMI) helped the common currency rise above the 12-year low it dropped to last week.
The dollar bull has been suffering greatly since last week’s dovish Federal Open Market Committee meet. The market’s conviction that the USD can rally from here has certainly taken a pounding, but they have to keep faith in the process of normalization of the Federal Reserve’s monetary policy. That is to say, a return to data dependence and lift off as fundamentally it will eventually boost the dollar. The problem for most of the traders holding long dollar positions is whether they have the risk appetite or the funding to stay true to their convictions throughout this market’s short squeeze. Even the timing entry of new dollar longs is taking a beating. The Fed’s expectation for the greenback is that coming policy changes will likely boost the dollar. The switch from “patient” to “not impatient” signals that normalization is coming, but there is reluctance to do so in June for fear that the dollar strength’s will get out of hand. The market prefers to price in a September hike or even further out the curve.
Since the Fed’s “patient” omission, it’s not unnatural to witness the pace of the dollar’s appreciation slow after some of the massive outsize gains against the majors so far this year. In fact, it’s normal for any currency to consolidate after such a move, especially with such positional interest at stake. Historically, following large moves, the USD has tended to trade sideways for several weeks at a time, and this time is no different. The Fed has basically shifted the market’s focus toward data dependent releases in justifying its stance and currency positioning.
The bulk of the dollar’s rise this year has been driven by the euro’s and yen’s weakness. Rate differentials brought about a change in monetary policy at the Bank of Japan and European Central Bank (ECB) which obviously favors the dollar. It’s reason enough why the greenback has been able to outperform despite some mixed U.S. data of late. There will be a turning point that will not automatically favor the dollar, but that probably will not occur until the market is much further along the U.S. “normalization” route.
This dollar negative squeeze, initiated by the Fed, is certainly painful for many. However, the big picture dynamics remain intact. From here it’s all about day-to-day position management. The structural drives for a lower EUR are very much in place, but short-term positioning and the overshooting of rate differentials would suggest that the single unit still has room to climb (€1.0975).
March’s small rise in the eurozone composite PMIs adds to signs that the slow recovery has continued in the first quarter, but France is still performing poorly. The increase in the headline economy-wide output index, from 53.3 to 54.1, was slightly better than the consensus forecast of a rise to 53.6, and left it at its highest level in four years. After rising in January and February, too, the average for the first quarter now points to a rise in quarterly gross domestic product (GDP) of about +0.3%.
