A Dollar Vacuum
If you’ve ever heard the phrase, ‘a rising tide lifts all boats’, you already know everything you need about today’s FX market. That is provided of course you’re not trying to analyse the rising tide itself, in this case our US Dollar. The Dollar is the counter currency to most key pairs and present in almost 90% of wholesale FX transactions. So, if investors wish to express a view on a particular currency there’s a strong chance it’s done against the Dollar. In fact, the term ‘FX’ in many contexts just means all/any non-Dollar currencies.
So, when the Dollar itself steals the show and exhibits the kind of weakness we have seen in recent session, the effect is felt everywhere. Identifying the causes behind the Dollar’s weakness is simple, but identifying how much longer this downturn may play out borders on the impossible. However, if you wish to have a go, the causes boil down to a combination of: Trump’s ambitions for Greenland, uncertainty over the next Fed Chair, the potential for US military intervention in Iran, the likelihood of collaborative FX intervention over Japan, domestic instability surrounding ICE, and threats of renewed tariffs.
In the options market we have seen risk reversals move to display a premium for those looking for downside protection from the Dollar. At the money volatility has also increased, reflecting the stress being perceived amongst investors as a result of this combination of geo-political risks. Markets will continue to be sensitive to any attempt from the White House to orchestrate a weaker US Dollar with the topic of Dollar debasement back in focus.
Discussion and Analysis by Charles Porter
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