US Dollar Moves Higher, Breaks Trend
Since the financial crisis of 2008, the US dollar has traded on fundamentals far removed from traditional forex trading expectations. Now, with signs of economic turnaround, the dollar may be returning to trade in-line with traditional patterns.
On Friday, Nonfarm payrolls for the month of January far exceeded expectations, printing at 243,000 against an estimated 140,000. Futures spiked, with Dow futures moving up over 100 points.
The US dollar initially traded lower, before rebounding and moving higher.
In a traditional sense, a country's currency moves in a correlated pattern to the general strength of the country's economy. In theory, when an economy is improving, the currency should also improve. Likewise, a declining an economy should have a weaker currency.
Yet, the dollar has largely defied this trend, as the US dollar has seemed to gain strength when the economy has been showing weakness.
The thesis for this trade has been that the dollar has been trading as a safety play, rather than a traditional currency. The dollar, being the world's reserve currency, has been seen as the safest asset in existence.
Ironically, in recent years when the US economy has showed signs of improvement, the dollar has sold off. This may have been due to the fact that investors—who had run to cash only as a safety play—were willing to use the bullish signals as motivation for moving back into riskier assets.
With the US dollar actually showing strength in the face of what appears to be an improving economy, it could be a strong sign for the broader economy.
Still, markets may have been slightly confused by data coming out of Europe.
On Friday, rumors circulated that Greece's new Prime Minister—only months on the job—was preparing to resign. Further, Jean-Claude Juncker, President of the Eurozone, stated that there would be no meeting of Eurozone officials on February 6th, as expected.
These headlines sent the euro spiking lower, even though a Greek government spokesman denied the report of the resignation.
Additionally, with an improving economy, the possibility of further quantitative easing seems increasingly likely. As other QE programs have weakened the dollar, the dollar may have seen strength as traders discounted the possibility of further QE.
Investors should continue to monitor the US dollar index going forward. If the dollar continues the trend of moving higher on positive economic news, it may be a confirmation that the economy is finally starting to breakout.
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