Dollar Strength Reflects Market Jitters - Daishi Capital

Investors are rotating into cash and bonds as the equity markets look increasingly overbought.

Daishi Capital - Broad expectations that the Federal Reserve is close to tightening policy is prompting an increasing number of investors to begin rotating out of risk assets into the relative safety of bonds and cash and the US dollar is benefiting. 

US dollar index (DXY) has appreciated by 7% this year as the world’s most powerful central bank has steadily tapered off its monthly purchases of US treasuries and mortgage-backed securities and become more hawkish over the timing of interest rate hikes.

“The dollar rally still has legs and whether that is based on concern that risk assets are too toppy or that growth elsewhere around the world is still weakening is neither here nor there,” said a “Daishi Capital” analyst. “We expect it to keep rising but there will come a point where it will begin to impact negatively on US economic data,” she continued.

The firm advises clients to regard emerging market risk assets as vulnerable to swings as investors seek to lock in profits and take shelter from what they perceive as a real likelihood of a selloff in equities.

“The increasing likelihood of some form of quantitative easing out of Europe is providing the dollar with a considerable tailwind and the probability of a further round of QE from the Bank of Japan isn’t doing it any harm either,” explained the Daishi Capital analyst. 

The firm says that, long term, it expects the Federal Reserve to revisit its quantitative easing program as economic growth in the world’s biggest economy inevitably tails off.

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