Big declines in many emerging market currencies have helped narrow current account deficits in the emerging world, making countries more resilient to
bouts of dollar strength.
This has been the
driver of dollar strength since the elections, and it remains to be seen how much of this is «buy the rumor, sell the fact.»
The yen's ability to buck the
trend of dollar strength in the past couple of weeks has been remarkable, and possibly due to worries over international conflicts and the continuing horror of the Ebola outbreak.
With financial conditions as the policy transmission mechanism, the element of time would determine the
sustainability of dollar strength and flatness of the Treasury curve.
As I write in my new weekly commentary, «The Curious
Case of Dollar Strength,» while small caps do have less exposure to international sales, they have proved more vulnerable to rising real interest rates (the interest rate after inflation) and investor anticipation of monetary tightening.
The DRS is always hedged against major market corrections, and many of the recent periods
of dollar strength came during periods of emerging market crisis.
At the same time, with risks to the global economy and markets looming (think Brexit, global deflation fears, China devaluation, etc...), risk - off sentiment could also reassert itself as a
driver of dollar strength.
While Wednesday's rate hike from the Fed was priced in, Odeluga says: «The lack of clear signals about plans to narrow monetary accommodation further — none in the statement and none discernible in chair Janet Yellen's press conference — meant that
some of the dollar strength actually had to be unwound.