There seems to be reason to believe excessive volatility exists to help leverage the inevitable breakout for the greenback; but there are active drivers that are weighing on the currency even when sentiment trends are letting up. The dollar is not a safe haven in the traditional sense. When investors are simply looking for safety, the greenback and its reserve assets (typically Treasuries) don’t offer the ideal refuge – especially after the recent downgrade. Instead, the US markets are prized for their liquidity – and we want liquidity when financial stability is breaking down. Therefore, we will look for the cracks in the system going forward.

In the past week, we have seen short-term US funding demand jump, credit risk in Europe surge and capital exit emerging market funds at the fastest pace in two-and-a-half years. Given the trend towards slower growth and lower yields, this is not likely to suddenly reverse.

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.