Dollar is oversold
Major currencies’ valuations should correlate to their yields, but lately they are diverging. Most G10 currencies are significantly above what yield differentially would suggest. Last week’s hawkish comments of the European Central Bank pushed EUR/USD above 1.20, its highest since the ECB started its quantitative easing.
Markets underestimate the US Federal Reserve’s commitment to stay ahead of inflation. As consumer prices increase – more quickly than is generally expected – interest-rate correlations will snap back into place, forcing a USD rally, especially against JPY, EUR and CHF.
EU and Euro are strong
Uncertainties about a German government coalition and the European Central Bank’s monetary policy stuttered the Euro mid-last week, but it recovered as a those worries faded. News arrived of a likely German agreement, while industrial, retail, trade and GDP figures all reported strongly, pushing the EUR/USD pair to the 1.22 range.
US markets remain on a roll. Inflation is finally reviving, and rumours that China will stop buying US treasuries appear to be unsupported.
