U.S. Dollar Unusual Behaviour Despite

From the middle of 2008 until February 2009, the dollar had been the safe haven vehicle. But in March, when risk appetite came back into the market, the safe haven trade began to slowly unwind. That means, since March, good news for the economy has meant bad news for the dollar.
You can see it in the chart below of the British pound vs. the U.S. dollar. The pound dropped sharply (U.S. dollar rose) on risk aversion as investors fled to the dollar. Now the pound is riding higher on a wave of surging risk appetite.

Within this risk environment, the relationship between financial markets and risk has been abundantly clear: When risk appetite is high … stocks, commodities, interest rates and all currencies (except for the U.S. dollar) rally. When fear creeps back in, the dollar benefits, the U.S. Treasury market benefits and almost everything else goes south.
So, when last week’s employment report showed a lower unemployment rate and fewer jobs lost, the dollar should have taken a hit. But it didn’t. Instead, it rallied!
Well, one day doesn’t make a trend.
And after the markets digested a cautiously positive statement by the Fed this week on the economy, the resulting activity in the currencies spoke clearly: For the moment, it’s still all about risk appetite.
I do, however, expect a shift in market focus to take place in the near term, to accommodate this growing sentiment of recovery. I think that global capital will begin shifting toward those economies that are relative outperformers. And for 2009 and 2010, consensus estimates have the U.S. outperforming other major developed market economies.
Last month, the IMF downgraded its forecast on the Eurozone, expecting the region’s economy to fall 4.8 percent in 2009. And for 2010, while all other economies are expected to grow, the Eurozone is expected to fall more.
Then Germany and France, the two largest economies in the Eurozone, shocked the market this week by posting actual growth for the second quarter!
On top of that, central banks are now upgrading economic forecasts for 2009, a year that was first thought to be a complete disaster. And the 2010 numbers are being boosted even more.
In fact, the European Central Bank has now revised its expectations for 2009 and 2010: Expecting just a slight contraction in 2009 and growth in 2010.
But in a period where less bad is the new good, and economies have stopped free-falling and are now showing signs of improvement, the recovery story is about sustainability, not just data points.