Recent USD weakness had many contributing factors - BBH

Research Team at BBH, suggests that the US dollar’s weakness in recent months, despite negative interest rates in Europe and Japan, likely had many contributing factors.

Key Quotes

“These factors include shifting views of Fed policy, weaker US growth, the recovery in commodity prices, including oil, gold and iron ore, and market positioning.

A new phase began in late April/early May. The dramatic rally in iron ore prices reversed, and the Australian dollar, bottomed against the US dollar in mid-January, seemingly to anticipate the broader trend weakness. It peaked a week before the other major currencies, including the euro, yen, sterling and the Canadian dollar.

The US dollar bottomed against a swath of currencies on May 3. The greenback’s technical tone began strengthening seemingly before the fundamentals. However, by time the dollar turned, the US economy was already recovering from the soft patch seen in Q4 15 and Q1 16.

Last week, the combination of constructive data, the FOMC minutes, and NY Fed President Dudley’s comments pushed up US interest rates and widened the premium relative to other major countries. The widening rate differentials provided fundamental support for the dollar.”