Fresh Dose of Inflation Can't Cure Deep-Rooted Dollar Sickness

(Bloomberg) -- A strong inflation print is what had been missing to re-energize dollar bulls, right? Well, not quite. 

The dollar did rise as U.S. consumer prices advanced more than anticipated in January, but its gains were short-lived. One only had to look at the yen, which ceded little ground to the greenback after the data even as other currencies retreated and Treasury yields surged, to know the dollar’s problems may be more deep-rooted.

There’s a “very profound” disruption of long-standing correlations behind the moves seen in the dollar-yen, according to Jens Nordvig, the CEO and founder of Exante Data.

“The FX market has been very surprised by some of the breakdowns in correlations we’ve seen,” Nordvig said in an interview with Bloomberg Television on Feb. 13, noting that the dollar-yen exchange rate has decoupled from U.S. interest rates. “The really big story is that the dollar is tanking.”

Fresh Dose of Inflation Can't Cure Deep-Rooted Dollar Sickness

Traders’ enthusiasm to buy the dollar against other currencies after the data proved fleeting as well. The Bloomberg dollar index reversed earlier gains to trade 0.3 percent lower at 12:18 p.m. in New York and continued to tread water even as the 10-year Treasury yield climbed to 2.90 percent, a fresh four-year high. The greenback has now dropped more than 3 percent since the beginning of the year, with the biggest loss among Group-of-10 currencies recorded against the yen at more than 5 percent.

Dollar bulls may be poised for more pain as investors reassess the outlook for the U.S. economy amid rising inflation and growing budget deficits. Currency markets are reckoning with an “inflection point”, where macro fundamentals point to further gains in the yen and the euro, according to Mazen Issa, a foreign-exchange strategist at TD Securities.

“Longer term, macro fundamentals tend to gain more credence here and investors put more emphasis on current account surplus currencies,” said Issa. “Certainly the yen and the euro are at the top of the list when it comes to that metric.”

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