Everybody seems to be searching for the missing link. Why is stronger US data not feeding into US rates and a stronger dollar?
The EURUSD move is fairly logical in the context of continued strong Eurozone portfolio inflows (and the risk that the ECB under-delivers) But the broader dollar move is more puzzling.
Over the last week, we have seen broad-based USD underperformance. The moves cannot be explained by rates. The moves cannot be explained by a reversal of safe-haven flows (as in Feb). While it is dangerous to over-react to the price-action over just a few days, there is starting to a pattern, over the last 2 months or so.
…Hence, the recent dollar weakness is harder to explain, and it is a time to think with an open mind. A few theories:
1. Perhaps, the ongoing dollar downward pressure is related to the ongoing (underlying) liquidity creation in the US, and the lack of liquidity absorption by the US equity market in 2014.
2. Perhaps, the increased momentum of carry trading is playing a role, as the dollar remains the funding currency of choice and as low volatility is increasing the attractiveness of carry.
3. Perhaps, the recent dollar weakness is a story about forward-looking investors having to reduce risk, due to broader performance issues.
Nomura