MNI ANALYSIS POV: USD Slide Overdone; Scope For DXY Rebound

-- Correct of headline at 3:58 pm ET

--Either FX Mkt Wrong or FI Mkt Wrong

By Vicki Schmelzer

     NEW YORK (MNI)   - When the dollar sees steady selling over an extended

period of time, it is not long before pundits begin discussing the greenback's

demise. 

     Indeed, such has been the commentary in the past few weeks as the euro

rises to new two-year highs versus the dollar. 

     That the euro rally was probably two-thirds driven by shifting views about

European Central Bank policy and only one-third by deemed dovish Fed commentary

would seem to be lost. 

     Some point to the U.S. Dollar-Index, made up of a basket of six currencies,

and say greenback is in the midst of a death spiral. 

     The DXY posted a low of 93.152 Thursday, the lowest level since June 23,

2016, the day of the Brexit vote, when it troughed at 93.019. 

     The DXY has a 57.6% euro weight, so the index is holding up pretty well

given that the euro is back at two-year highs. 

     At the low seen earlier, the DXY was down 8.9% on the year, i.e. from the

102.21 close from Dec. 30, 2016. 

     The run-up in the U.S. dollar and U.S. Treasury yields in the wake of the

U.S. presidential election was largely driven by anticipation of tax reform and

stimulus from the new administration, so a better comparison would be to look at

pre-election levels. 

     Using this metric, at the earlier low, the DXY was down 4.8% from the Nov.

8 close at 97.861. 

     As background, the Dollar-Index bottomed at 91.919 on May 3, 2016, and

topped out at 103.82 Jan. 3, 2017. At Thursday's low, the DXY nearly had

reversed this rally. 

     In May 3, 2016, ten-year U.S. Treasury yields stood near 1.80% and were

trying to claw their way back to the 2.0% highs seen in mid-March 2016. 

     Later last year, ten-year yields topped out around 2.64% in mid-December,

about three weeks before the DXY topped out near 103.82. 

     Flash forward to today, 10-year U.S. Treasury yields hold near 2.314% in

afternoon action Thursday, and even at the 2.103% lows posted June 14, which

were the lowest yields since the November election, U.S. yields remain well

above the levels seen last May. 

     In contrast, the Dollar-index has broken below the 50%, 61.8% and 74.8%

Fibonacci retracements of the May 2016 to January 2017 rally, at 97.869, 96.465

and 94.728, which normally would point a return to last May's lows.

     But, given where U.S. Treasury yields are and the prospects for another Fed

hike in 2017, the DXY looks oversold, with scope to gravitate back towards at

least the November election low near 95.885, if not its 61.8% retracement. 

     Another way to gauge current dollar valuations as favorable or unfavorable

requires a look at where the greenback stood Dec. 16, 2015, the day the Fed

began lift-off, by raising rates 25 basis points. 

     That day, ten-year U.S. Treasury yields closed around 2.30%, not far from

current levels. 

     On Dec. 16, 2015, the euro closed at $1.0912, dollar-yen at Y122.21, the

DXY at 97.871, dollar-peso at MXN16.9832 and dollar-yuan (on-shore) at

CNY6.4726. 

     Comparing these levels to current levels of $1.1677, Y111.15, 93.89,

MXN17.7454, and CNY6.7430, the dollar is down 7.0% versus the euro, down 9.0%

versus the yen, down 4.1% as per the DXY, but up 4.5% versus the Mexican peso,

often used as a proxy for EM FX, and up 4.2% versus the Chinese yuan. 

     Death spiral? Not quite yet, unless the FX market is right and U.S.

Treasury yields are wrong.  

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

[TOPICS: M$U$$$,MT$$$$,MX$$$$,MI$OI$,MN$OI$]