US dollar: Greenback likely to remain in the doldrums

It has been extraordinary turn of events.

Hold a mirror to a chart of the S&P 500 and you will see a near-perfect inverse image of the dollars performance against the euro over the past four years. The economic theory from which currency forecasting emerged would not have it this way.

Currencies values should depend on their relative interest rate advantage and, for most developed markets, that means their economic prospects.

Since nothing matters to foreign exchange markets like the dollar it is one side of nearly 90 per cent of all transactions this more than justifies the endless fascination of strategists and investors with US economic data.

So when the dollar and the biggest US stock index began to diverge this year, currency watchers were justifiably excited.

Could this be a return to the traditional economics they were brought up on, and a move away from the strange and blunt risk-on, risk-off trading that has characterised the crisis-struck years?

The short answer is no ... READ MORE

Released by the Financial Times - 25 April 2012