It has been another relatively subdued week in currency markets, but despite another batch of disappointing economic data out of the US and accompanying falls in US interest rate expectations, the dollar has held up relatively well. In part, that may simply reflect the fact that the greenback has already fallen sharply in recent weeks, as well as a reluctance to test major levels (1.10 in EUR/USD & 1.25 in GBP/USD) ahead of two key US data points (non-farm payrolls tomorrow and CPI next Wednesday). That said, the reaction to this weeks’ weaker than expected US data has been somewhat different from earlier in the year. Previously, weak US data tended to support equities and “high-beta” currencies – the somewhat paradoxical “bad news is good news” effect, which often comes into play in the run-up to recessions. But this week has seen safe-havens like the yen and the franc (as well as gold) outperform on the back of poor US data. Our sense is that this is a sign of things to come: as the US and other advanced economies slide towards recession later this year, risk sentiment is likely to worsen further, leading to a more sustained rebound in the dollar.
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