The dollar’s resilience in the wake of recent dire US economic data has raised the prospect that the currency market may be experiencing one of its periodic changes in focus.

Analysts say currency investors could be eschewing their long-held chase for yield and instead looking through the current slowdown to reward currencies with the best prospects for growth.

Currency investors love a theme and for much of the past six years they have been happy to reward central banks that raise interest rates by buying these countries’ currencies while selling currencies where rates are being cut.

This held true as the Federal Reserve started cutting interest rates in the second half of last year, sending the dollar down to a record low of $1.4968 against the euro in November.

However, the dollar has held up against its major trading partners over the past three months in spite of a string of bad news suggesting that the US economy could be heading into recession.

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Even the 125 basis-point cut in the Fed funds rate over the last month has not forced the dollar beyond last year’s lows. Last week, the dollar put in its best performance against the European single currency for 18 months.

Analysts say the counter-intuitive strength of the dollar is a warning that the drivers of the foreign exchange market may be changing.

“The market does not seem to be driven at the moment by interest rate differentials, which would point to a weaker US dollar,” says Marc Chandler at Brown Brothers Harriman.

He also says the foreign exchange market no longer seems so closely correlated to the equity market

At the start of the global equity market correction in November, rising risk aversion boosted the low-yielding yen and Swiss franc as investors liquidated carry trades, in which the purchase of riskier, higher-yielding assets is funded by selling the low-yielding currencies.

But the yen and the Swiss franc lost ground against the dollar last week in spite of a sharp sell-off in global equities.

Mr Chandler says it is possible that the focus of the currency markets will shift towards economic growth.

“With the nearly unprecedented pace of US monetary easing and fiscal stimulus, more observers seem to be be coming around to our view of a short and shallow economic landing in the US rather than a long and deep downturn and this is supportive of the dollar,” he says.

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