Quick FX Update

The US dollar remains soft, but the downside momentum seen in recent days appears to be ebbing as new catalysts are awaited. The dollar’s slide is not over and bounces are expected to be shallow and short-lived. The main catalyst continues to current interest rate differentials and their likely trajectory.

The contrast was underscored yesterday as the ECB’s Stark indicated the ECB was still planning an exit from unconventional provisions while the risk of renewed measures by the US and the UK run high. The dollar slipped further against the yen and has now given up roughly two-thirds of the intervention gains, even though the poor outlook for December contained in the Tankan Survey underscores the likelihood that the BOJ responds with additional measures as early as next week. The dollar is softer against most emerging market currencies.

One often helpful guide I continue to monitor is the US-German 2-year spread. The US 2-year has found a new "equilibrium" near 40 bp. The latest widening of the spread has come as German rates back up. The spread now is 34 bp in Germany's favor from 28 bp 5 days ago.
Quick FX Update Quick FX Update Reviewed by Marc Chandler on September 29, 2010 Rating: 5
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