[Dan]

Although the US and global economy remain very weak, a recent up-tick in some leading indicator data has raised hopes that the worst may have now passed. The idea that a slowing in the rate of contraction will soon give way to actual recovery in activity has taken hold. This has prompted capital re-allocations away from relatively defensive US markets (both equity and fixed income) to emerging markets and pushed commodity prices higher (a negative terms of trade shock). Consequently, the USD has weakened sharply.

What is driving the USD?
The FX market has been subject to significant swings over the last eight months as the focus of investors has flipped from the threat of debt deflation – which creates safe-haven and de-leveraging related demand for USD – to the potentially inflationary consequences of the aggressive policy responses aimed at tackling the economic fallout of the financial crisis. Policy responses in the US
have been seen by many investors as jeopardizing both long-term price stability and fiscal sustainability.