Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

World stocks and the S&P 500 hit new highs on Tuesday, boosted by the flood of strong U.S. earnings reports, while anxiety over U.S. President Donald Trump's policy direction lifted safe-haven gold to fresh peaks and sank the dollar to a four-year low.

More on that below. In my column today I look at the why Japanese authorities might still unilaterally intervene in the FX market to support the yen, even though the chances of joint action with the United States are probably quite remote.

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* Dollar torpedoed ...

The U.S. dollar is under extreme pressure, with the latest wave of selling pushing it to new four-year lows on a broad basis. Unnerved by geopolitics, President Trump's policies, Washington wanting a lower exchange rate, or worries over Fed independence, investors are dumping the greenback. 

Like last year, the 'Sell America' trade is manifesting in FX - U.S. stocks are probing record highs and Treasuries are pretty steady. Short-term technicals and momentum are not on the dollar's side, and longer term, the dollar still looks expensive on a broad real effective exchange rate basis. 

* ... while safe-haven Swissie soars

Given the dollar's travails, and with the Japanese yen suffering from domestic policy uncertainty and a plunging bond market, the Swiss franc is living up to its traditional FX status as the safe-haven king. 

On Tuesday euro/Swiss fell to 0.9163 francs. That's the lowest since January 15, 2015, when the SNB abandoned its exchange rate cap, sending the franc up as much as 30%. Excluding that day, the Swissie has never been stronger against the euro. It is also at an 11-year high against the dollar. 

* And yet, stocks to the moon!

Despite the political, policy and trade storms tearing through currency and precious metals markets, stocks are soaring blissfully to new high after new high. Strong U.S. earnings, solid growth, and confidence in the AI boom are doing the job.

The question is, how long can equities remain immune from the rising uncertainty and volatility elsewhere, particularly FX. Sharp dollar declines, especially if accompanied by selloffs in the bond market, are bound to put equity investors on edge.

The yen has surged more than 4% since Friday without Japanese authorities spending a single cent in the foreign exchange market. If Tokyo wants to capitalize on this move, now is the time to strike.

The Japanese currency's leap to a three-month high near 152.00 per dollar on Tuesday came after the New York Federal Reserve conducted rate checks on dollar/yen on Friday at the behest of Tokyo. Spooked traders took this as a sign that coordinated U.S.-Japanese intervention to strengthen the yen might be imminent. 

That hasn't happened yet. And there are good reasons why joint action – a rare event - is unlikely at this juncture. 

But unilateral intervention from Tokyo, with tacit approval from Washington, cannot be dismissed out of hand.