U.S. Dollar Soars On Brexit, Safety And Reserve Appetite Strong Winds

Fundamental Forecast for Dollar: Bullish

• Deepening risk aversion and a concentration of reserves can provide a strong drive for the Dollar
• Rate expectations have collapsed after Brexit with the market pricing in a 11% probability of a rate cut in December
• See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page

The Dollar soared this past week in the fracas that resulted from the market realizing the United Kingdom had voted to leave the European Union. In fact, the ICE Dollar Index(with more historical data) enjoyed its largest single-day rally since the crisis era back to December 2008 at 2.1 percent. That move is testament to the extraordinary volatility in the FX and broader financial system this past week as well as a clear motivation for safety. Monetary policy as a general market theme has served the Greenback well. However, the divergence of efforts amongst the world’s largest central banks was inevitably constrained which in turn limited the Dollar’s potential. In contrast, the appetite for safety can be a boundless well of strength for the currency.

This past week, the market finally acknowledged its exposure to risk. Similar to the exceptional moves in August and at the turn of the year, there was a systemic move across the world and across asset types that was generated from sentiment. However, unlike the previous flashes of panic, there are deeper roots to this tumult. China’s financial troubles and recognition of tighter monetary policy (contributions to the previous moves) are important, but they come with inherent curbs. Policy authorities in the world’s second largest economy have remarkable control over its economy and markets while their intentions for distortion are kept in check by their desire to cement their position in the global economy. Dependency on monetary policy is a deep vein but skepticism can (and has) hold strong in the face of uncertainty. An event like the Brexit is dramatic and progresses too many threats to carry limited engagement.