It is beyond dispute.  The US dollar is in a powerful bull run.  There are two main drivers, and their ability to dominate the price action varies according to the news stream.  The first is constructive economic news from the US that reinforces ideas that the Fed will likely raise rates next year.

The second driver is what is happening in the other key centers.  This is the aggressive monetary easing by the Bank of Japan and the diversification by Japanese pension funds.  It is also the trajectory of the ECB’s monetary policy, with the range of assets it is buying likely to increases over the next few months.  This driver also includes the loss of momentum in the UK economy and later and slower tightening cycle than previously anticipated.  

The year-to-date performance of major foreign currencies may surprise many casual observers.  The weakest currencies are not the euro and yen, which are both down around 9.7%.  The Swedish krona has seen the largest depreciation, falling 13.4% so far this year, followed by the Norwegian krone, which has fallen about 10.4%.

In the past week, it was the yen and sterling that led the declines, both with about a 1.3% loss. The yen is being pushed lower by the diversification of Japanese savings overseas.  Stepped up foreign purchases of Japanese assets, especially stocks, appears be largely transacted on a currency-hedged basis.

The US dollar finished the week above JPY116.00.  Like many we were surprised by the aggressiveness of the BOJ and GPIF.  We now see potential for the dollar to move toward JPY120 over the month or two.  Support is pegged in the JPY115.00-50 area.  Last week, we had noted that the greenback was flirting with the upper Bollinger Band.  However, the higher volatility means that the two-standard deviation band is considerably wider.  The upper band now is near JPY118.85.

For its part, sterling stabilized in first half of last week, but the dovish Quarterly Inflation Report pushed it over.  It fell around 2% in the last three sessions.  The report warned of the risk that inflation falls below 1% over the next six months.  Investors knew this meant a later start to the rate hiking cycle.