USD: Investors continue to re-evaluate 'US exceptionalism' - Rabobank

US treasuries appear to have drawn some comfort today from the Supreme Court's ruling that the unique structure of the Fed may protect its board members from potentially being removed by the President, Rabobank's FX analyst Jane Foley reports.

USD short-covering in a 1-to-3-month horizon can't be ruled out

"This will temper potential credibility issues for the Fed which will dampen inflation fears, at least until the end of Chair Powell's term. That said, this week's bout of USD weakness demonstrates that investors are continuing to re-evaluate what is and was meant by 'US exceptionalism'. For several years, the 'buy America' trade appeared to be a failsafe for many investors around the globe."

"This is no longer true, and the failure of higher US treasury yields to boost the greenback this week suggests that investors are continuing to overhaul their views regarding the risks that are facing the US economy. While there is a wide variation of views about the US budget, growth and inflation outlooks, the heightening of risks surrounding all three has been clearly making the treasury market jittery. In turn, this is having negative repercussions for US stocks as well as the USD."

"That said, the outlook for US assets has to be viewed in the context of alternative investments outside of the US market. It is possible that some of these markets are now beginning to look overbought. Although we see EUR/USD higher at 1.15 on a 12-month view, we cannot rule out bouts of USD short-covering in a 1-to-3-month horizon. Similarly, while we are forecasting USD/JPY at 140 in 12 months, we see risk of pullbacks to 145 on a 1-to-3-month view."