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Investor sentiment has diminished and the US currency has subsequently climbed. The correlation between risk appetite and the dollar is hard to miss; but it isn’t the only fundamental driver for the benchmark – it is just the most influential. The other prominent factors for the greenback are the same yardsticks for value that every currency is measured against: interest rate and growth potential. For yield, the dollar is still lagging most of its counterparts.

The Economy and the Credit Market

Investor sentiment has diminished and the US currency has subsequently climbed. The correlation between risk appetite and the dollar is hard to miss; but it isn’t the only fundamental driver for the benchmark – it is just the most influential. The other prominent factors for the greenback are the same yardsticks for value that every currency is measured against: interest rate and growth potential. For yield, the dollar is still lagging most of its counterparts. At 0.249 percent, the three-month US Libor stands at a discount to even its Japanese and Swiss counterparts (both considered funding currencies for the investing world). However, the outlook for interest rates is far more hawkish in the US than it is in Japan – sentiment that we can confirm through expectations priced into overnight index swaps. According to Credit Suisse’s data, the US is looking at 82bps of tightening over the next 12 months and Japan only 1 bp. In fact, policy officials took another step towards loosening the reins today. Though the FOMC would vote to keep the benchmark interest rate unchanged at its range between zero and 0.25 percent with the ‘extended period’ time frame; there was finally dissention from a member in the loose time frame and hard expirations dates have been placed on most of the emergency programs. As for growth, the IMF and World Bank’s forecasts for the US economy are significantly higher than the European Union and Japan. Perhaps Friday’s 4Q GDP reading will add another leg of support for the dollar.