- An easing of the USD shortage is a pre-condition for a sustainable USD sell-off. Use the spread between the offshore and onshore USD funding rates as an indicator of the extent of the USD funding shortage. A narrowing of these spreads would signal an easing of the USD funding shortage.
- Beyond this, the USD is likely to weaken only when investors become more concerned about the Fed’s commitment to price stability and the deterioration of the US fiscal position relative to other countries. Despite the quantitative easing to be undertaken by the Fed, the US yield curve remains relatively flat, signalling little concern yet about the Fed’s commitment to price stability. A steeping in the US curve relative to the European curve would be another precondition for a USD sell-off.
- Finally, with interest rates in the UK, Japan, euro area and US likely to converge close to each other by the end of Q1, the fiscal imbalances will takeover from interest rates as a major driver of currencies. A further decline in the swap spread between the US 10-year OIS and Treasuries, particularly relative to the same spreads for other countries, would be a sign that the financial markets are becoming more concerned about the US fiscal position.
U.S. Dollar: When will the rally end?
December 8th, 2008 · No Comments
Tags: Forex Market
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