"If the US economy continues to show improvement, it could be a win-win for the USD" says Markos Solomou, risk manager from easy-forex.com. Here's why it is 2012's currency to beat.
It's been a good start to the year for the US currency on the back of two key factors improving US employment data and investors' fears that the eurozone crisis is escalating.
US employment growth accelerated last month and the jobless total dropped to a near three-year low of 8.5%. That's hardly rock bottom but at least the trend seems positive. In December, the US economy actually created 200,000 new jobs at a time when other major economies such as the UK are shedding them.
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Meanwhile, although not part of the single currency, the latest country sitting uncomfortably close to the eurozone to show signs of distress is EU member Hungary. It is now in talks with the International Monetary Fund on ongoing funding as its latest auction of three-month Treasury bills saw yields hit a heady 7.98%. The fear is that a Hungarian default could cause contagion amongst close neighbours with exposure Austria being the most obvious candidate. All this as uncertainty mounts about some of the eurozone's core members including Italy, Spain and France.
Little wonder nervous investors have been dumping the euro and flocking to the US currency even if it is little better than "the best of a bad bunch" globally as my colleague John Stepek noted in a recent Money Morning.
And here's the interesting twist as Solomou notes, "for the past four years the greenback has traded inversely to risk appetite" rising at signs of global economic distress and falling when risk appetites return (so investors seek out higher yields elsewhere). But over the last few months this trend has been broken the USD has tended to firm up both as bad news pours out of Europe and better US data comes through. So what next?
Until Germany comes charging to the rescue of the eurozone with some sort of monster ECB quantitative easing package, the euro looks set to keep on struggling even as it tests multi-year lows (and even then, euro QE should weaken the euro rather than strengthen it). Meanwhile, spread betters will keep a keen eye on the next set of US non-farm payroll data due on Friday, 3 February for confirmation of the positive recent jobs trend. Barring a pretty big shock reversal, the USD looks to be the currency to back for now.
