Risk on is the name of the game, and the tone seems to be strengthening. Over the last year positive risk sentiment has meant a stronger dollar, and I still believe that should be the case, but right at this moment the dollar doesn’t seem to be getting much traction, even against the Brexit infected pound sterling. It’s easier to understand what’s going on with a currency like the Australian dollar which is up over 14% since the year-to-date lows in mid-January (see below), the recovery in commodities and risk assets generally is all the explanation you need for AUD/USD.

The question has to be… is further positive risk sentiment going to adversely impact the dollar? I rather suspect at some point the greenback will regain leadership, but only after the market comes to believe that the global recovery is sustainable and the world can cope with higher interest rates. Perhaps it will take a few months of solid data in the United States and no disastrous data out of China, before the market starts to assign higher probabilities to more rate hikes sooner, thus allowing the dollar to start appreciating again. The bottom line is that risk should continue to rally as long the Federal Reserve keeps pace with the assumptions the market is making. Should the time come when the FOMC indicates that they have a more aggressive hiking cycle planned than the market believes, then risk sentiment will turn negative again, but first the dollar will probably spike. For now this is more to do with recovering risky assets than the greenback.

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