Fall In Global Equity Markets And Flight To Safety Should Help USD

This morning’s sharp fall in european equity markets and overnight falls in Asia, combined with the Dow Jones futures nursing a triple digit fall, should give a boost to the US dollar. However, this has not been the case thus far today with the greenback below last Friday’s closing levels against the euro, Sterling and yen. The US dollar was picking up strength against most currencies at the end of last week after the slump since July. The US dollar has weakened from 1.28 euro to 1.36 euro in 3 months, from 1.48 USD to 1.61 USD against Sterling, 101 yen to under 97 yen over the same length of time.

The partial shutdown of the U.S. government, which has entered its seventh day today, is a "momentary episode," Secretary of State John Kerry said in Indonesia over the weekend. Conventional wisdom would favour dollar strength in the face of a GDP-sapping shutdown and a flight to safety.

With the US still in lockdown we could see further delays to key data releases, but if we do get to a resolution the US dollar would gain ground very quickly with data like Non-Farm Payrolls, which will be key.

The current weakness in the US dollar is helping US exports and with consumer goods in europe and the UK at least 20 per cent more expensive than those in the US, surely dollar weakness cannot continue. Markets always over-shoot and this time round is no exception.

The FOMC minutes to be released on Thursday are among the biggest releases of the week as they will give more clarity on the Fed’s close no-taper call from the September 18 meeting. If tapering is about to begin sooner than what the market is now expecting, there could be a sharp reversal in the US dollar’s fortunes. Markets have a habit of doing the unexpected.

The US dollar at the beginning of the year was predicted by many to be the currency to gain ground through 2013, how wrong has this been. However, there are still more than two months until the end of the year – will the US dollar do the opposite again of what most are predicting?