USD: Still room to recover - ING

The dollar continued its rebound yesterday, although early trading today is favouring some momentum in the yen and Antipodeans. In the coming days, markets will continue to carefully assess how close a truce in Ukraine is, and crucially at what conditions. So far, Russia and the US have held bilateral discussions that have excluded both Ukraine and the EU. Hints at future Moscow-Washington cooperation can reinforce the notion of isolation for Europe from a defence and economic perspective and contribute to a rotation away from European currencies into safe haven USD and JPY, ING's FX analysts Francesco Pesole notes.

Moscow-Washington cooperation seems bad for Europe

"US Treasury underperformance likely helped the dollar regain some ground too. 10-year yields are back at the 4.55% mark, threatening a retest of the two highs of the past 30 days at 4.65%. We are also seeing a decline in the 30-day S&P500 - Bloomberg Dollar index correlation from the -0.60 peak a month ago to the current -0.35. In the immediate aftermath of the US election, that correlation had turned unusually positive. The S&P500 reaching new highs yesterday did not seem to interfere with the dollar recovery."

"The biggest macro event of the week is the FOMC minutes from the 29 January meeting released this evening. Markets have received multiple indications from Fed Chair Powell that there is no rush to cut rates and that the focus has shifted back to inflation concerns. We'll be looking for any assessment of the new US administration policy plans in the minutes, and risks are probably a reinforcement of the hawkish message."

"Despite a more balanced picture for DXY after the past two days of dollar gains, the short-term valuation picture has not really moved back to the expensive side and the risks remain skewed to a stronger dollar in the coming days."