Forex: US dollar surges higher as correlation between EUR/USD and risk loosens

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Category: Financials

Published on Thursday, 03 January 2013 12:50

Written by Rob Samson

The US dollar (Currency:USD) is surging today; the US dollar basket (a broad indicator of the currency's strength) is 0.43 pct higher at 8034.

The pound dollar exchange rate is 0.6 pct in the red at 1.6157.

The euro dollar exchange rate is 0.69 pct lower at 1.3096.

Correlations between dollar and risk

Today's price action by the US dollar is remarkable in that it is clearly outperforming the falls witnessed by equity markets.

The FTSE 100 is nearly flat on yesterday while Wall Street is set to open about a quarter of a percent in the red.

Thus, we would be inclined to believe currencies are breaking their relationship with the risk-on / risk-off driver.

However, a note from KBC Markets does expect this relationship to remain intact:

"It is too early to conclude that the dollar will be more driven by positive news from the US and that the risk-on/risk-off paradigm is losing its grip on markets. That said, we continue to look for signs of a more classic, cyclical reaction of the dollar to US eco data."

Despite yesterday's euphoria uncertainty over US debt still exists

Supportive of the US dollar will be the uncertainties surrounding the US fiscal position.

As Lloyds Bank say:

"News that US Congress reached a deal over the fiscal cliff saw some market relief prompting an initial downside move in the USD index; however this was short lived and the USD soon recovered back to opening levels. The deal only partially addresses the fiscal cliff, with longer-term spending cuts still to be agreed as well as negotiations on the debt ceiling still to be done That should keep the USD well supported."

ADP employment will be of interest ahead of tomorrow’s payrolls, market is expecting a pick up from November which was impacted by Hurricane Sandy to 140k.

The FOMC minutes will also be of interest, as we look for more colour on the reasons for replacing Operation twist with Treasury purchases as well as the FOMC’s thinking behind linking interest rate guidance to thresholds for unemployment and inflation, however with much of the details announced in the statement in December, market reaction is likely to be muted.