Spreads fight back
The renewed selling pressure created by President Trump’s challenges to the Fed’s independence left the US Dollar deeper in oversold territory. We have seen momentum and strength indices suggest the Dollar has been oversold on several occasions over the past few weeks. However, given the current market conditions and volatility, this hasn’t been a reliable indicator for a recovery in the greenback. The correlation between the Dollar and tariff talk has become too strong, such that technical indicators can be overwhelmed by sentiment on trade and the economy.
In the absence of European trade, the Dollar declined still further on Easter Monday amidst light liquidity. EURUSD swap spreads have continued to widen as momentum favours US rates testing higher whilst demand grows for longer dated European debt. Usually short dated EURUSD swap spreads are heavily correlated with the EURUSD spot price, indicating the Dollar could recover upon an improvement in liquidity conditions and some peace and quiet on the topics of the trade war and central bank independence. Such moves are likely to serve as only a temporary tailwind to an otherwise structurally weaker Dollar.
Weak data such as that observed in Europe’s PMI data yesterday will continue to support any such recovery in the Dollar. A major risk to the existing trend of USD weakness will be any further optimism from Treasury Secretary Scott Bessent. His recent observation that the current tariff paradigm was unsustainable was sufficient to catalyse a recovery in the Dollar. It would be fair to conclude those comments were relatively measured and mild showing a far greater scope for recovery upon signs of tangible progress within existing and future trade negotiations.
Discussion and Analysis by Charles Porter
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