What's Behind the Dollar Rally After the U.S. Close?

Includes: ERO, JYN, UUP
by: Kathy Lien

The US dollar skyrocketed after the NY close and the driver is only one thing: risk aversion.

Volatility has ripped through the financial markets, with the Dow Jones Industrial Average plunging 344 points and the US dollar surging to a year to date high against the Euro. With the exception of the dollar’s performance against the Japanese Yen, the greenback’s strength has been universal.

In yesterday’s Daily Currency Focus, we said that the dollar could see a near term reversal. That happened briefly with the EUR/USD hitting an intraday high of 1.4545, but once the US stock market started falling, the dollar resumed its rise. Given the drop in equities and bond yields, the only explanation for the divergent move in the currency market is risk aversion. The dollar has once again received a flight to safety boost. The sharp sell-off in carry trades including USD/JPY provides further evidence that risk aversion is behind today’s move.

Bill Gross, the legendary bond fund manager for PIMCO, appealed to the US government to start buying assets to prevent a “financial tsunami.” Everyone from banks to hedge funds to sovereign wealth funds are reducing risk and Gross believes that the US Government needs to be the buyer of last resort. We continue to call for more weakness in carry trades with a move below 105 very likely for USD/JPY.