US Dollar rally on despite risk worries

Strong demand for risk assets boosted markets yesterday with Central Banks supplying the main source of support for investor risk appetite, with a mixture of lower policy rates and quantitative easing providing a major boost.
US Dollar rally on despite risk worries
Furthermore, numerous central banks seem to be talking down their currencies and/or intervening, contributing to the heavy weight versus Greenback.

Normally the Dollar would not improve during times of risk appetite, however it is finding ample support from the fact that Fed policy is set to change direction along with other central banks and the currency is breaking key levels against major currencies including EUR, JPY and AUD .

The rise in US Treasury yields is sustaining the US Dollar, aided by steadier US economic data particularly on the employment side.

Reports in the US are suggesting that the Fed is crafting an exit plan from QE, though the timing is still in question, another aspect assisting the Dollar at the start of this week.

Numerous Fed speeches over coming sessions will likely deliver further hints on any timing or plans for an exit policy. In the meantime, higher US yields and a firmer USD continue to mound pressure on gold prices.

There may be a little restraint in forcing the Greenback higher this week as US data releases are likely to look softer, with retail sales, industrial production and housing starts set to record declines.

Nevertheless, any reversal in the USD or yields could merely deliver improved levels for traders to go long the Dollar and short Treasuries especially as data elsewhere will not look much better.

Indeed, while in Europe there will be a likely bounce in the German ZEW investor confidence index in May, Q1 Eurozone GDP will record a contraction for the sixth consecutive quarter.

Promising headlines from Europe are not about bullish updates such as strong pace of growth or higher rates of return drawing in more capital.

Replacing it you will find, ‘positive’ news from the region is more of the cut of avoiding another crisis state. Yesterday discussions on both Cyprus’ and Greece’s austerity struggles, officials declared the support of a €2 billion for the former and €7.5 billion for the latter.

Nonetheless, we have seen several times before that these funds are just insignificant markers in a much longer-term fix. There are plenty of dangers ahead – and the market will maintain it’s scepticism.

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