Since the spring, the USD has been weak vs. developed markets and strong vs. emerging markets. On an overall basis, that adds up to weak, since most of the currency volume is in the big, developed market currencies, namely the Euro, the Yen, and to a lesser extent, the Pound, Australian Dollar, and Canadian Dollar.
One look at UUP makes that evident. The UUP is 57.6% Euro, 13.6% Yen, 11.9% Pound, and 9.1% Canadian Dollar. That dollar ETF is heavily weighted to the Euro. With the EUR/USD cross at a 6 month high, the UUP ETF is right around its lowest level since November 2011:
I’ve been wrong about the dollar over the past few months. My thought was that rate differentials, the Fed’s move to eventually taper, and the outperformance of the U.S economy and U.S. financial assets would lead to greater dollar strength. That has not happened, with the Fed the most notable culprit.
But the Fed’s stance is well known at this point. The question here is how much of the Fed’s dovishness is already priced in to the market? Well, the EUR/USD chart shows the key level to watch after its breakout from its downtrend last week:
The FOMC release last week cleanly broke that 2 year downtrend. A move back below 1.3250 would put the ball back in the bear’s court, but for now the bulls are in clear control here.
Meanwhile, emerging market currencies remain weak, even after their September bounce. The JPMorgan Emerging Market Currency Index I highlighted last month remains near its 2008-2009 lows:
The story of the past few months has really been one more of emerging market currency weakness than dollar strength. The dollar’s developed market peers remain relatively strong, and the Fed’s non-taper combined with this week’s debt ceiling debate has taken the dollar index to 6 month lows. The dollar’s at a pivotal spot now from a long-term perspective.