Dollar Jumps Back

The dollar has reversed higher after falling to new lows for the year against the euro and Swiss franc, and sliding against most of the other major currencies.   What had begun as a bit of profit-taking has turned into a route.  

A sharp drop in US equities goosed the Treasuries higher and the dollar and yen's recovery gained some momentum.  Then Draghi's comments from Vienna pushed on the open door and the euro took another leg down, surrendering all of the session's gains to return toward yesterday's lows just below $1.3845  Even if the euro is not pushed through yesterday's lows, the ugly price action will make the dollar bears, who had the whip hand, think twice.   

Draghi, in effect, reiterated what other ECBers have said since last week's meeting at which the ECB did not change policy.  Essentially the message is this:  While the ECB does not target the exchange rate, it does impact the macro economic performance.  In particular, it is negative for growth and price pressures.  The economic recovery is weak, fragile and uneven.  It does not need another headwind, thank you.  While deflation is not an immediate risk, persistent low inflation is also problematic.  The euro's rise is of a sufficient magnitude that is increasingly adversely impacting the regional economy.  By clear implication, it increases the chance of a policy response.  

The dollar has, though slumped against the yen.  It has approached a band of support that extends from about JPY101.50 to JPY101.20.  Remember that the safe haven status of the yen does not mean that foreign capital flocks to Japan in times of market turmoil.  Rather, and especially in the current context, participants who are short yen are covering, in part not because the view of the yen as changed, but because asset on the other side of the trade has.   

Given the yen strength and large equity market decline, Asian markets are likely to post sizable losses on Friday.  Even though the weaker euro may help take some pressure off international businesses, the risk is on the downside there as well.  Core bond market should do well and it will be interesting to see if the peripheral bonds, like Spain, Italy and Portugal outperform on the downside, like they did on the upside.   Ahead of the weekend and Crimea's referendum and the uncertainty that surrounds that region and also China's economy, traders may not have much of an appetite to fight the momentum.