The U.S. dollar recently dropped to its lowest point in 10 months. So why is the talk in foreign exchange markets about whether the greenback and its related exchange traded funds (ETFs) are poised for a pop?
Currency traders wonder whether the U.S. dollar is in a position to appreciate as the U.S. economy begins to right itself, reports Peter Garnham for Financial Times. The risk premium for holding U.S. assets is also dropping since the economy seems to be responding well to the large fiscal and monetary stimulus.
But some hesitate to acknowledge an outright end to the dollar’s weakness after only one single piece of good economic data – the jobs report. Historically, positive U.S. economic data has resulted in the dollar weakening since traders would abandon U.S. assets and turn toward higher returns elsewhere.
One reason the dollar appreciated was that interest rate expectations surged on the data. Another is that the price of oil went sideways; price gains in oil often send the dollar lower. The Fed is also due to meet and if it remains dovish then the dollar may stay stronger.
Callum Henderson of Standard Chartered thinks the recent appreciation may be a freak, short-term occurrence. Henderson believes that the U.S. interest rates may hold until 2011 and the dollar could depreciate even further in the next few ears.
- PowerShares DB US Dollar Index Bullish (UUP): down 5.4% year-to-date
- PowerShares DB US Dollar Index Bearish (UDN): up 4.4% year-to-date
For more information on the dollar, visit our U.S. dollar category.
Max Chen contributed to this article.