Currency Markets

The currency markets, which witnessed a fall in the US Dollar, against the currency majors has reversed the trend for the time being. The gains made by the US Dollar is more pronounced against the Euro and Japanese Yen. Against Yuan, it has held its position well at stable levels, whereas against the Pound Sterling it is still relatively weaker but better off compared to the position about a month back. The change in the direction of the US Dollar has come close on the heels of a change in the US treasury yield curve, the yield curve has shifted upwards, with no change in the segments up to three years. After the shift in the yield curve, the ten-year benchmark is hovering around the 1.14% mark, and it is showing no signs of any decline. It also is an indirect indication that the currency yield of the US dollar may likely increase, and this has resulted in the strength of the Dollar. There are other factors also at work. The expectations of a larger stimulus and the better than expected and rather strong corporate earnings are providing buoyancy to the equity markets. When more than 50 % of the S&P 500 companies have declared their quarterly results, Q4 results, more than 80 % of them have beaten the street expectations. Job market conditions have not improved much but retail spending is good, and this would point towards gradually improving economy. Positive guidance on earnings from a larger number of companies is also adding to the asset demand for Dollars. These factors support stronger US Dollar. The issues in the aftermath of Brexit and the widespread lockdown in most parts of Europe are things which have worked against the European currencies including Euro and the Pound Sterling. In the immediate term we may see further upside for the Dollar. Apart from all this, the prospects of higher inflation in the US and an accompanying Fed tightening are also perceived as currency positive.

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