Dollar Decouples from Risky Assets

It has become a habit to consider risk aversion as the overriding determinant of moves characterizing the global financial landscape. This continued to be case in the month gone by. Yen trotted the sub-90 levels and dollar was strong for most part of the month. While the two currencies have remained continually bid in the recent past on intensifying aversion to risk, some tectonic shifts appear to be underway, at least as far as the greenback's course is concerned, with the Fed target rate poised to close in towards the nominal zero bound. There has been a breakdown in correlation between the risky assets and dollar, which now seems to be feeling the pinch from poor domestic prints, unlike in the recent past.

Tentacles of the crisis have now spread across Asia, with China reporting some shocking activity prints, including the biggest contraction ever in import growth in November. Japanese business sentiment also slid by most since the first oil shock, underscoring the tough times facing the economy.

As the crisis threatens to choke global growth, magnanimous easing was harped upon by one and all, with most central banks trying to appease the markets by their aggression. BoE slashed rates by 100bps, ECB by 75bps and China by 108bps in unprecedented moves. Besides, several countries called upon the strength of their fiscal ammunition.

Free fall in asset prices, slowing economy and reversal in the commodity cycle have made deflation a more perceptible threat than at any time in last few decades. The spotlight has thus turned on the unconventional pills mulled over by the policy makers to re-energize growth.