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The Fuel Sources for a Dollar Rally

Thursday, 14 Mar 2013 | 12:31 PM ET
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If you have been marveling at the dollar's recent strength — and perhaps starting to wonder how far it can run — wonder no more.

The currency strategists at Bank of New York Mellon are pointing out some trends that explain much of the dollar's rise.

Neil Mellor points out that while although real money investors like pension funds have been participating in the stock market rally for a while, "only now are these investors beginning to actively buy the USD itself." That shift could provide significant support for the dollar.

Then there is the matter of the improving U.S. economy, evident in the latest retail sales and jobless claims data but also in the recovering housing market.

An improving economy "can only encourage nervy questions about the market's long-term dependency upon the Fed's 'punch bowl,'" or pro-stimulus stance, Mellor said. "However, not only has the Fed has assured that the Fed Funds rate will be going nowhere whilst unemployment remains above 6.5 percent, but even then, provided inflation expectations are under control, an FOMC led by Ben Bernanke will be reluctant to move too quickly." So he argues that for now, the improving economy should bolster the buck.

Samarjit Shankar has analyzed investment flows, and he said that overall, investors attitudes toward the dollar seem to be shifting and becoming more positive.

"The U.S. dollar remains in favor, having been net bought for seven consecutive days," he wrote in a note to clients on Wednesday. "Strong activity numbers will help maintain investor expectations that the U.S. economic recovery is best placed amongst G-3 to begin gaining traction this year."

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