The US dollar movement is important because every market variable is either positively or inversely correlated to the dollar, said Jurrien Timmer of Fidelity Investments. When the dollar goes down, liquidity conditions ease up, which is usually the risk-on scenario.
If the dollar moves up, it means financial conditions are tightening, or at least that has been the dynamic over the past year or so during the observed trading range, which makes the dollar the key indicator, he noted.
Asked if he is looking at a broader dollar index or only watching major currencies such as the euro and the yen, Jurrien said he follows the broader dollar index and not the DXY, which is half euros.
The broader dollar index has all the emerging-market currencies in it, which makes it a good proxy because a lot of the stress has been the EM currencies going down, including the Chinese Yuan, and including the policy divergence between the US and other central banks putting pressure on the Yuan.
That has been a very big driver during the risk-off period over the past year. Hence, only the broader dollar index counts, he explained.
Asked if the only factor that the dollar is responding to currently is rhetoric from the Federal Reserve, Jurrien said the US currency moves around for different reasons. The underlying problem is that there’s a monetary policy divergence; the Fed wants to tighten, other central banks are easing which puts upward pressure on the dollar as anybody would expect.
The Fed put that into remission few months ago in March when Yellen turned much more dovish after the December hike, and rolled back their dot-plot they showed in December. In March, the Fed policy makers turned much more dovish, and the market keeps wondering if the Fed is going to remain dovish or if they would back-track on their earlier decision.
So far, the Fed has remained pretty dovish and the odds for a June hike is hovering around ten percent. Investors are out of the woods for now, but speculation would start about whether the next hike would come in September or December, which makes it an ongoing battle, he concluded.
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