Dollar Races Ahead

The US dollar’s surge continues. The Dollar Index is testing the space above 93.00. A month ago it was below 90. It does not appear to require fresh developments. The market continues to trade as if there are short dollar positions that are trapped at higher levels and the briefest and shallow pullbacks are new opportunities to adjust positions.  

Even a rate upside surprise in European data was not sufficient to prevent the euro from plumbing to new lows for the year near $1.1880. There is a 1.1 bln euro option struck at $1.1950 that expires today that may mark the cap. There is another option struck at $1.1850 for half as much that may denote the lower end of today’s range. 

Germany reported a 1.0% rise in March industrial output compared with median forecasts for a 0.8% increase. That said, half of the overshoot was offset by the downward revision to the February series to -1.7% from -1.6%. Separately, Germany reported a larger trade and current account surplus.  Helped by a 1.7% rise in exports and an unexpected decline in imports, the politically-sensitive German trade surplus rose to 25.2 bln euros from 18.4 bln in February. The current account surplus jumped to 29.1 bln euros from a revised 21.7 bln. It appears to be the second large monthly current account surplus on record.  

Meanwhile, the political stalemate in Italy has barely impacted the markets; until today. Italy’s stock market is off 2% (while the Dow Jones Stoxx 600 is 0.2% lower. Italy’s 10-year benchmark yield is up nine basis points.  

The greenback’s recovery also is taking place as US rates stabilize. The US 10-year yield remains below 3.0%, and the volatility of the bond market (MOVE) slipped to four-month lows yesterday. The two-year note yield has been hovering about 2.50% for more than two weeks.  

We suggest that the paramount macro consideration is that policymakers and investors can be more confident that the Fed’s objectives are reachable than in other major areas. This is partly true because the US expansion is sufficiently advanced that the policy goals of full employment and price stability are already at hand or nearly so. It is also partly true because of the huge fiscal stimulus in the pipeline.