Great Graphic: Trade-Weighted Dollar

In early Asia today, the euro reached its
highest level against the dollar since the US election last November. 

Sterling was near seven-month highs.  It is primarily because of the
strength of these two currencies that many characterize the dollar as
weak.  

While the euro and sterling are important
currencies, their strength overstates the weakness of the US dollar.
 
The Federal Reserve’s measures of the trade-weighted dollar are calculated on a monthly basis.  The
Bank of England has trade-weighted indices for many currencies, and they are
updated fairly.  

The Great Graphic,
created on Bloomberg, shows the BOE’s trade-weighted dollar since the end of
March. 
  The TWI peaked on April 10 at 105.20 and then fell to
103.90 within eight days.  Today it is back at 104.90.   
The BOE’s trade-weighted dollar averaged 102.20 last year.  Through April,
it has averaged almost 104.60 this year. 

Consider the dollar’s performance against its
four largest trading partners:  Canada, China, Mexico, and Japan. 
Since the end of March, the Canadian
dollar has fallen by 2.8%.  It is the second worst major currency after
the Australian dollar (-3.4%) over this period.  The Japanese yen has
fallen nearly 1%. China’s yuan is off 0.2%. 
The Mexican peso has depreciated by almost 2.5%.  

Sterling and the euro are exceptions to the
strength of the dollar reflected in the trade-weighted measure.
 
Sterling is up  3.7%, and the euro
is up 2.4% over this period.  Sterling has boosted by May’s call for snap
elections on ideas that by strengthening the government’s mandate, a better
deal can be cut with the EU.  This does seem very persuasive as the recent
summit makes clear.  May’s mandate is not the issue.  

The illusions that Merkel and Juncker
suggested UK officials are operating under have nothing to do with the Tory’s political mandate.
It is about
what cost (monetary and opportunity) of the divorce.   One member of
the MPC dissented at the last BOE meeting in
favor of
an immediate hike, and Forbes will likely dissent again at this
week’s meeting.  However, if anything, short-term UK rates has softened
slightly since the end of the first quarter.   

Adjustment to the speculative sterling
position in the futures market may seem counter-intuitive.  Since the end
of March, the gross short sterling position fell 3.5k contracts to 135.6k.
   As a point of reference, the
record was set last October near 154k.  The shorts have barely squared up
despite the appreciation in the spot market.  What has happened is new
longs have been established.  Since
the end of March, the gross longs have
grown almost 20k contracts to 54.3k. 

The euro’s rise has been helped by ideas that a consensus is emerging to change the
ECB’s forward guidance. 
Specifically, many are anticipating a change
in the either the risk assessment or in the assessment that rates will remain
at present levels “or lower.”  
The euro’s gains against the dollar have also been
aided
by the single currencies 8.6% rally against the yen since
mid-April.  The US two-year premium over Germany peaked on March 9 near
223 basis points.  It fell to 192 basis points on April 24 as the market
responded to Macron’s victory in the first round of the French presidential
contest.   It is now a little below 200 basis points, which is where
the 20-day average can be found

The net short speculative euro position in the
futures stands at its lowest level since mid-2014 as of May 2. 

However, the speculators have a somewhat
smaller gross long position.  The gross shorts were trimmed, which
explains most of the modest reduced in the net short position since the end of
Q1.  

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