US Dollar Appreciates Against Euro on Dow Jones Tumbles

The US dollar traded modestly higher through end-of-week currency trading, as sizeable declines in the Dow Jones Industrial Average encouraged traders to close dollar-short positions. Indeed, the dollar has kept a strongly negative with the Dow Jones and other risky asset classes—effectively trading lock-step with the now-infamous forex carry trade. The dollar now carries the third-lowest overnight interest rate of all G-10 currencies, and traders have taken advantage of that fact to sell it against high-yielding counterparts. Yet signs of market duress will easily shake increasingly risk-averse speculators out of their low volatility forex strategies, and the dollar will likely gain on any continued drops in the Dow and S&P 500.

A virtually empty US economic calendar left the dollar to the whim of broader financial market forces, and little stood in the way of a Dow-led greenback rally. Such risk aversion likewise led to substantial drops in domestic Treasury yields and similar moves in short-term interest rate expectations. Yet markets seem impervious to developments in domestic bond yields. The dollar’s resilience in the face of sharp Treasury yield drops represents a clear break from more normal market conditions. That said, it remains relatively clear that risk sentiment will be the main driver of dollar price action through the coming months of forex trade.