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USD: Has the dollar turned?

I’m baffled why an increase in risk aversion has also boosted the strength of the USD’s mini-me, or sterling as it is better known.

The trend is your friend. Until it isn’t. Sometimes, FX moves look very easy to predict, but recent gyrations have completely baffled me and, it seems, many market participants too.

Once again though, the old reverse barometer has proved the most accurate predictor. This time it is reports of the USD’s imminent demise that have proved premature. But has the tide turned? Commerzbank Corporates & Markets says: “In the medium term, we are very much dollar bulls. It would therefore be only too tempting to read the USD exchange rate movements of the past three days as the beginning of the trend reversal that we are expecting. Yet we are sceptical. The cause of the dollar’s gains – the general increase in risk aversion in financial markets – is hardly the driver to buoy the dollar in the long run. This risk aversion story may quickly prove ephemeral.”

Indeed it might. I’m extremely baffled why an increase in risk aversion has also boosted the strength of the USD’s mini-me, or sterling as it is better known. It would seem that the market is being driven by extreme positioning that is affecting even the most liquid of currencies.

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