Risk on/off or interests differential approach

“There are now two divergent views in the currency markets. One has traders buying the dollar as a safe haven when the US data is bad, and selling dollars moving into ‘risk trades’ when the economic data in the US is positive. The other view which has recently started to catch on has currency traders selling dollars on bad economic news in the US, and buying the greenbacks when the data is strong. This is a more traditional approach, and focuses on interest rate differentials. When the US data is bad, the thought is that the FOMC will be forced to keep rates low. On the flip side, when the US data shows a stronger recovery, a potential FOMC tightening moves traders to buy the dollar. Choosing which strategy to use is determined by your thoughts on the global recovery. If you believe the global recovery can’t happen without the US consumer, then you choose the ‘safe haven’ approach. But if you feel, as I do, that the rest of the world is going to be able to recover without a strong US consumer, then your focus shifts back to interest rate differentials and the global growth story.”
Form Daily Pfenning 8/6/2010