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Commodity Currencies Could Bear the Brunt of a Stronger Dollar

Commodity Currencies Could Bear the Brunt of a Stronger Dollar

Global commodity currencies and the pound are poised to suffer most among Group of 10 currencies if the dollar makes a more strident comeback.

The Norwegian krone, sterling, the Swedish krona, Australian and New Zealand dollars will cop the biggest losses, and in that order, a study of G-10 currencies suggests. The study, based on the sensitivity of currencies to changes in the U.S. Dollar Index over the past year, shows the Canadian dollar will be the least affected.

Commodity Currencies Could Bear the Brunt of a Stronger Dollar

The study illustrates why the yen was less than perturbed by the swings in the market Monday amid considerable head-scratching by market observers as to why the haven currency didn’t rally amid the risk-off. Clearly, for currency traders, Monday’s move was more about the dollar’s comeback as a haven currency rather than a broad risk-off signal.

While it’s too early to call the greenback’s move a trend, the rebound comes barely two weeks after readers were warned about a wide divergence in fair values of key G-10 currencies. At 93.644, the dollar index is still undervalued in a currency fair-value model by well more than 3% and has a long way to go before that gap can be closed.

Commodity Currencies Could Bear the Brunt of a Stronger Dollar

Only time will tell whether the dollar’s comeback is here to stay, but what is clear is that some crosses have more to lose than others if Monday’s moves morph into a trend.

NOTE: Ven Ram is a currency and rates strategist for Bloomberg’s Markets Live. The observations are his own and not intended as investment advice.

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