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THE US dollar’s woes continued, trading near multi-week lows with shocking US real gross domestic product (GDP) revisions. The finalised US real GDP was further revised lower to an annualised contraction of 2.9% in Q1 2014 – the largest decline in five years – from minus 1% reported last month and compared with 2.6% in Q4 2013 due to harsh weather in the early part of the year.
THE US dollar, proxied by the US dollar index (DXY), strengthened further on steady positive US data flows, which in turn helped lift its bond yields. The yield on the US 10-year note kept above 2.6% and not far from its one-month peak of 2.65%. As long as the yields stick close to recent peaks, downside risk for the dollar proved to be mild.
AS widely expected, the European Central Bank cut the refi rate by 10 basis points to 0.15% – a negative deposit rate, a targeted long-term refinancing operation with conditions designed to channel credit to non-financial public sector and to intensify preparatory work on outright purchase in the asset-backed securities (ABS) market but not everyone is pleased.
The US dollar remained weak with the US Dollar Index hitting a low of 79.060 on May 6. The dollar was overshadowed by the escalating unrest in Ukraine although an olive branch was extended by Russia in mid-week to end the violence. Investors’ incentive to hold the dollar was also dampened by the fall in the long-end US Treasuries (UST) yield with the 10-year bond yield dipping below 2.6%.
THE US dollar remained fragile as the currency flirted with three-week lows against the euro and weakest in nearly five years against the pound on the back of stiffer US macro headwinds, news of somewhat better inflation in Europe and faster-than-expected UK manufacturing numbers.
LONG US dollar positions being unwinding – the US dollar index fell deep below the 80 handle – since Tuesday in response to retracement of US treasury yield to below 2.8% and to the Federal Open Market Committee (FOMC) minutes on Wednesday, which were more dovish than expected, and to some degree watered down the message from the FOMC itself.
AS widely expected, the US Federal Open Market Committee (FOMC) decided to taper the size of its monthly asset purchases by another US$10bil. The committee announced that it will now purchase US$55bil in assets each month – US$25bil in mortgage-backed securities (down from US$30bil) and US$30bil in Treasury debt (down from US$35bil) beginning in April.