Is this a new phase
The easy answer for US dollar strength today is that it's all about higher yields and a rebound in US stocks. Part of that is surely true but consider this:
I think this plays out in phases in the FX market. The wave of USD weakness recently has been about the unwind of structural carry trades. It was unhedged European and Japanese money buying US Treasuries to try and get some yield.
Perhaps those flows have been unwound.
The second phase will be a classic rush to safety. I think that includes a large amount of money -- particularly from emerging markets -- flowing into US dollars.
A good reason for why we might be there now is because US yields have essentially reached the zero bound. Yes, they could fall another 50-100 bps but I don't think they're currently high enough above zero to offer any real attractiveness, especially in a risk-averse environment.
With all this, I think the US dollar can outperform the euro once again, but not the Swiss franc or yen. The commodity currencies and EM currencies are particularly vulnerable.
