The currency market seems to be lacking direction with trading being confined to recent ranges. No major strategies stood out. Investors' mood switched from being risk averse at one moment to chasing after yields the next. The uncertainty was also reflected by the fact that the best performers among the majors were the two lowest yielding currencies, JPY and CHF, and the two highest yielding ones, AUD and NZD. For the year to date, these four currencies provided a nominal return of 3% to 4%.

Despite the Fed's aggressive cumulative 125 bp rate cut in January, the US dollar was little changed against the euro and actually strengthened just over 1% versus the British pound and the Canadian dollar since the start of the year.

The dollar's relative resilience was due to the view that the Fed's cumulative rate cuts would help revive the growth momentum in the US, while other economies are starting to feel the impact of a US slowdown. In addition, dollar sentiment was also underpinned by expectations that other central banks would have to follow the US's lead to cut interest rates sooner or later. The Bank of England has already started easing, and the Bank of Canada is probably the next given its dependence on the US for export growth. Even the European Central Bank has shifted from its hawkish stance and is paying more attention to growth risks.

When these central banks wholeheartedly embark on easing campaigns, the interest rate advantages that their currencies currently enjoy against the greenback would diminish. The US dollar may then be able to rebound against majors and a 1.40 against the euro before the year end may not be unrealistic.

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