Weekly: FX – USD rallied across the board

by: Georgette Boele , Roy Teo

The dollar continued to move higher against the euro but the rally was more broad-based. Central banks in Europe calmed interest rate markets and this helped sentiment. The ECB struck a dovish tone with its introduction of the forward guidance and hints of the possibility of rate cuts. This put heavy pressure on the euro across the board. EUR/USD dropped below 1.29. The stronger-than-expected US employment report pushed EUR/USD towards 1.28. Stronger global economic data, led by the US, should support investor risk appetite. It should also provide a strong tailwind to the USD versus the EUR. The dollar has been strongly correlated to equity markets and growth expectations over recent months. Recently the correlation between the USD and the 2-year yield has moved into strongly positive territory. At the same time it kept its positive correlation with the Dow Jones. This indicates that the USD is not only driven by the economic outlook but also by the outlook on interest rates. We expect both variables to remain positive drivers going forward leading to a sustained fall in EUR/USD.