Dollar Is Running Out Of Currencies To Rally Against

By Simon White, Bloomberg Markets Analyst and Reporter

Real-rate differentials are a headwind for the dollar, with the DXY continuing to look like it is in the process of topping.

Putin’s remarks on Ukraine this morning gave another bid to the dollar, inching the DXY to new cycle highs. But the gains are becoming more marginal, and the yen is no longer participating as the market expects the authorities in Japan to soon intervene, which has the potential to trigger a significant yen rally (keep an eye out for any yen comments at tomorrow’s BoJ meeting).

The majority of countries continue to have higher real rates than the US, including all the currencies in the DXY basket except the SEK. Adjusting for volatility gives an idea of how attractive currencies are for carry traders. As the chart below shows, about two-thirds of major ones offer relatively high vol-adjusted real carry rates, i.e. these are currencies that carry traders would cause to appreciate against the dollar.

The dollar-long is becoming very consensus, but longer-run leading indicators have been saying for weeks the dollar is in the process of topping. Today’s Fed meeting has all the hallmarks of a set up for a disappointment, given speculation over a 100 bps hike, but the unlikelihood the Fed will deliver.

Putin’s announcement is depressing the euro, but the fact is it changes little to the bigger picture of a protracted war with energy-supply constraints and a latent nuclear threat – and a lot of that is already in the euro’s price. The yen is struggling to go any lower, and sterling bears are coming thick and fast, with even ex-BoE MPC member Danny Blanchflower calling the pound a short.

As Bob Farrell, former head of research at Merrill Lynch, put it, “When all the experts and forecasts agree, something else is going to happen.”