Higher equity’s and lower commodities have formed the market narrative for the past few weeks. Foreign exchange has taken a back seat as most of the major currency pairs remained range bound.
The US Dollar is finally getting it’s time in the lime light. Unfortunately it has taken the backdrop of global unease to bring this about. It is only last week that the markets were trading on the prospect of the falling Dollar giving way to top side breakouts against both the Euro and the British Pound.
Recent Dollar buying is not the result of fundamental economic shifts, if anything the US data of late has been more disappointing than that of other developed economies. Nor can the Dollars upsurge be attributed to technical trading factors, on closer examination of these it can clearly be seen that Dollar support is largely absent. Similar to when an adventurous and independent young child falls in the playground and goes running to daddy. Investors that have gradually taken on more risk assets retreat back to their traditional safe havens at the first sign of trouble.
The Ukrainian situation until now was largely self contained with any international posturing simply being contained to mild body language from the EU and Russia. This morning’s warning from Washington that the Russian troop build up on Ukrainian border is a ‘grave’ miscalculation was all it took to send markets into turmoil.
There is really very little prospect of direct US involvement in this conflict, beyond perhaps the occasional flexing of diplomatic muscle. In more normal times therefore the markets sudden and decisive reaction could be considered overdone. We are however not in normal times. Developed economies are slowly recovering from one of the hardest hitting recessions since the Great Depression. It is a very fragile recovery, investors are still very nervous, and as just demonstrated, are prepared to drop risk and run to safety at the first sign of trouble.
Gold, Swiss Francs and Government Bonds are all benefiting from safe haven status today. US Government Treasuries are near the top of buyers lists, but to buy US bonds you must first buy US Dollars.
To contact the reporter of this story: James Brennan at firstname.lastname@example.org