FOR a while, it seemed that two market trends were inexorable. The euro was falling towards parity with the dollar and yields on German ten-year government bonds were on their way to zero. Both reversed in April (see chart).
The shift was so dramatic that it seems likely investors were caught napping. Dhaval Joshi of BCA, a research group, says that the European Central Bank’s bond-buying created a degree of “groupthink” among investors, with everyone convinced that yields were headed lower. When the trend changed, there was a stampede for the exits.
In the currency markets, investors were bullish on the dollar at the start of the year in the belief that the American economy was strengthening and that the Federal Reserve would push up interest rates, perhaps as soon as June. But the economic data have been disappointing: revisions may show that GDP declined in the first quarter and the Atlanta Fed’s GDPNow model suggests the second quarter is only on target for annualised growth of 0.7%. Meanwhile, economic data in the euro zone were generally better than expected—hence a pattern of selling the dollar and buying...Continue reading
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