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Who's afraid of the stronger dollar?

Weekly investor research

16 March 2015

A light week for global economic data was dominated by a further increase in the USD against a broad set of currencies and the first week of ECB government bond purchases, which drove EUR government bond yields lower. With the USD not supported by strong US economic data (except for the headline payroll numbers) but propped up by monetary stimulus elsewhere, the disinflationary effects of a strong dollar on the US economy are starting to be being priced in. This can be seen in stalling US equity markets, which last week fell another 1.20% and are lagging other developed markets significantly year-to-date. This was also apparent last week in the retracement of the US treasury yield curve, which reversed the previous week’s sell-off to end the week 4 to 13 bps lower, and flatter. The latter move was also supported by renewed weakness in oil prices, with Brent crude contracts down 7.7% on the week to USD 54pb. In Emerging Markets (EM), data releases confirmed the positive effects of lower oil prices on inflation and trade balances in a number of countries. However the rapid rise in the USD is generating some anxiety in a number of countries – such as Mexico or Turkey for instance – where monetary policy objectives are pivoting from growth to financial stability. The week also brought some interesting insights about the policy intentions of Chinese policy makers, who are grappling with the opposite challenges of having a currency attached to the strong USD.

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