- US Dollar looks increasingly attractive
- Risk on suggests higher Fed rates
- Risk off inspires safety bids
WIN, WIN - The US Dollar has been slowly gaining momentum in recent weeks and I think this momentum will continue to gain traction. At this point, there are probably many out there doubting such a prospect, but in my view, the US Dollar has a lot more room to run in the weeks and months ahead. I remember a time, in the lead up to 2008, when the Australian Dollar could only go up. It seemed that if risk was on, Aussie rallied on the positive correlation, and if risk was off, Aussie rallies on the push higher in GOLD prices. There was always a reason to buy Aussie.
YIELD APPEAL - And now, it seems as though we are in a similar situation with the US Dollar. How does it work with the Buck? Well, if risk is on, the US Dollar has appeal because it means the market is feeling good, which means the Fed doesn't need to worry about leaving rates lower for longer. Remember, US economic data has been strong these past several weeks and if it weren't for worry abroad, the Fed may have hiked again this summer. So if the market is feeling good again about risk, this ultimately should get the Fed thinking about raising rates, which is USD supportive.
SAFE HAVEN APPEAL - If on the other hand risk comes off in a big way, the market is no longer concerned with rate differentials and is only thinking about flight to safety. And what currency benefits from flight to safety? You got it. The US Dollar. Yes. It's true the Yen and Swiss Franc also benefit from the flow, but on a broad basis, the US Dollar gets a good chunk of safe haven flow. It's also important to remember that both the BOJ and SNB have no interest in seeing their currencies appreciate, leaving the Buck as the only natural safe haven currency.