[ForexNews]

When equity markets rallied and ISM surprised to the upside yesterday, the USD fell. In fact, it fell very much in line with the increase in US rates rather than the spread between US rates and euro zone rates. Thus, good US economic news continues to be bad for the USD. We note that spreads did not widen in the USD's favour at the 2y tenor and conjecture that markets do not expect the Fed to hike anytime soon, even if the economic data strengthen, while they expect foreign central banks to be more aggressive.

The perceived asymmetric response to improving economic data by policymakers in the US and abroad remains a major reason that the USD continues to fall on good news. For this to change, the Fed would have to begin to signal that it would respond more aggressively to strong incoming economic data. FX markets may now be looking at rate moves at the long end of the US yield curve with some indecision about whether they reflect timely Fed tightening or some risk of it falling behind the curve in hiking rates.