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The Financial Times – Dollar in a rut as recovery disappoints

Back in January, foreign exchange strategists predicted 2012 would be the year of the dollar. The US currency was expected to enjoy strong gains as a positive recovery story unfolded in America. Instead, the dollar is stuck in a rut. Rather than soar, it has traded in a tight range against other big currencies as that economic recovery has looked less certain. The dollar index, which weighs the US currency against a basket of other global currencies, is almost flat for the year-to-date, having risen just 0.3 per cent. And, inexplicably for many traders given the divergence between the health of the US and eurozone economies, the dollar is also barely changed against the euro this year. In fact, for all the revived fears about the euro area’s debt crisis, the single currency has risen 0.5 per cent, trading on Tuesday at about $1.30. For currency traders, the big question is whether the US Federal Reserve will embark on another round of “quantitative easing” – dubbed QE3 – this year. That would prove negative for the dollar. The message here has been mixed, in line with recent economic data. While the US central bank raised growth forecasts for this year at its quarterly meeting last month, Ben Bernanke, Fed chairman, was keen to stress that its monetary easing tools “remain very much on the table”. That has led to markets forensically combing over each set of economic data – what foreign exchange analysts call a “data dependent approach” – to assess whether it adds or takes away from the case for QE3.

Source: Bianco Research

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