Will Dollar Weakness Persist?

With global economic recovery seemingly in place and several central banks now focused on possible exit strategies from their unconventional ultra accommodative monetary policies, the dollar’s fate is now depended on the direction of US short term interest rates. As we’ve recently noted , the dollar, not the yen has become the dominant funding currency in the carry trade due to the fact that US 3 month LIBOR rates are now lower than those of Japan. From a practical standpoint that means the greenback is now subject to massive selling pressure anytime risk appetite picks up, as carry is highly correlated to rising equity prices. Therefore the question facing the market is whether the Fed will abandon its quasi-ZIRP monetary policy any time soon.