Sensible Dollar Makes Other Currencies Look Overpriced

March 17, 2014

New York (Mar 17)  A quick look at the Dollar Index (DXY) chart shows the US currency about to once again test 12 the month low at .7900. The peer group currencies of developed economies are all pushing toward multi year highs and yet it would be very difficult to argue that these economies are fundamentally in any better shape than the US.

Therefore what is holding back the Dollar? Or more to the point is the Dollar being held back?

It is possible that there is somewhat of an illusory effect here. The US Dollar index appears cheap at current levels because of its rapid fall from the mid .85s it was trading at during the middle of last year. In fact the Dollar index is currently right at it’s 10 year average level. The logical conclusion here is that other currencies are looking overpriced, particularly the Euro, Aussie Dollar and Pound Sterling.

Absent from the US Dollar price at the moment appears to be the premium that the heightened geopolitical situation in the Ukraine should contribute. As tensions with Russia have risen over the past few weeks there has been more than a trickle of funds flowing into US assets. This however is not immediately evident from the price of the Dollar for two reasons.

Firstly, a correcting currency has a tendency to over correct. The Dollars return to the long term mean should have been a more volatile affair, but in reality a steady stream of Dollar buyers has cushioned the currencies fall.

Secondly, as US and other global investors are leaving riskier assets for the relative safety of US Treasuries, Russia and Russian investors have been doing the opposite. The Crimean situation always held the possibility to escalate to the level of US sanctions against Russia. Such sanctions were always going to take the form of a freeze on Russian assets within the US. Dollar and Treasuries buying by US and International investors has therefore been recently met with Dollar and Treasuries selling by Russian investors.

Fundamentally the US economy is both stable and returning to strength, when the geopolitical cloud clears Dollar volatility may return but large scale deviation from the mean is likely to become a short term occurrence.

Source: FOREXminute

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