Dollar index dips on stimulus optimism

Dollar falls against euro and yuan

The US dollar index fell to a one-month low overnight, retreating 0.40% to 93.05. Most of the fall can be attributed to a strong performance by the euro, which rose 0.45% to 1.1815 overnight, presumably as a pro-cyclical beneficiary of the continuing US stimulus talks. Both AUD/USD and NZD/USD actually fell, with GBP/USD and USD/JPY almost unchanged. The Chinese yuan and Korean won continued to gain versus the dollar, as North Asia’s economic recovery continues in earnest. The two Asian currencies have put together impressive rallies since mid-September. We expect the Bank of Korea to increase the pace of its recent currency interventions, stepping up its purchases of US dollars for Korean won.

The US dollar is on the back foot in Asia today, with EUR/USD climbing to 1.1835, and the AUD and NZD outperforming, eliminating their overnight losses plus interest. Both have risen 0.35% higher this morning, up to 0.7075 and 0.6605, respectively. The upward movement is in contrast with the overnight session where both were in danger of testing long-term support.

Asian currencies have also rallied across the board as the stimulus trade continues to gain momentum—the strong performance by US index futures this morning leading the way and lifting sentiment. The yuan and won, notably are at 18-month highs, although the Singapore dollar, Thai baht and Malaysian ringgit remain rangebound, albeit consolidating longer-term gains.

As with equities, currency markets appear to be moving to price a pre-US-election stimulus deal as an inevitability, particularly among the pro-cyclical G-10 and Asian currency groupings. As with equities, I would say that markets are ignoring the risks of this groupthink at their peril. However, I accept that momentum is with a lower US dollar, and my voice is lost in the yelling of the FOMO crowd.

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