USD downside could be ephemeral – UBS

Las week has seen a continuation of the risk-rally sparked in mid January, still propped up by the same factors: a stronger-than-expected figures in some key-indicators in Europe, never-ending promises (no facts so far) of an imminent deal regarding the PSI negotiations in the Greek front, successful bonds and T-bill auctions in peripheral euro zone debt markets – Portugal may be an (worrying?) exception – and ECB’s LTRO flooding the markets with cheap money.

Of course markets are all about a trade-off between risk and what is considered safer assets. The US dollar, a solid representative of the latter, is being hammered since the start of this (now sharp) upside. The FOMC has decided on Wednesday to leave the interest rates at “exceptionally low” levels until late 2014 and to follow an inflation target of 2% in a YoY basis, measured by the evolution in the core PCE. Coupled with the above, the likelihood of further quantitative easing should the US economic fundamentals deteriorate accelerated the sell-off in the world’s reserve to levels last seen in mid November 2011. M.Mohi-uddin, Managing Director of Foreign Exchange Strategy at UBS, emphasized that B.Bernanke’s testimony to Congress on February 2 has thus become more important now.

But the analyst also remarked that further QE is unlikely to happen according with the last Q4 GDP figures, showing an increase of 2.8% in the US economic activity over the last twelve months. Therefore, the sharp sell-off in the greenback could have priced in already the more dovish stance in the Fed. “This keeps us wary of chasing the greenback lower from current levels”, he finished.

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