Dollar Resilience Still Impressive

The U.S. dollar’s resilience is impressive. The head of the European Central Bank gave the clearest signal to date that he plans on raising rates on December 1st and the market could not even keep the greenback down for an hour.

The firmness of the dollar is all the more noteworthy because it is taking place most recently as interest rate differentials move against it. Since the end of October, the interest rate implied by the March Eurodollar futures contract has increased by 5 basis points, while the yield implied by the comparable euro contract has risen by 21 basis points.

The Reserve Dilemma

The persistent worry about the US current account deficit has subsided and has been replaced by anxiety over the vast accumulation of central bank reserves and the risk of diversification out of dollars. This concern seems exaggerated, but it is unlikely to go away any time soon.

Dollar Bulls Still in Driver's Seat

After stalling near midweek, the U.S. dollar’s upside momentum has been rekindled. The greenback’s gains are especially impressive because they have been scored in the wake of disappointment on two of the most market-sensitive reports: U.S. employment and trade balance. Moreover, these gains are being registered at the same time that interest rate differentials with the euro-zone have actually narrowed. At the short-end the December Eurodollar futures contract is off 7 ticks over the past three weeks. The December Euribor futures contract has shed 15 ticks in the same time. U.S. 10-year yields have risen 17 basis points in the past month, while the yield on 10-year bunds has risen 32 basis points.