Why the Dollar Still Has Some Fuel

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Corporate earnings are a compelling reason to stick with the dollar.

This is according to a new research note from UBS.

The Swiss investment bank says what's needed to push the dollar lower is weak U.S. economic data, but, that's missing, thanks to the long-running government shutdown.

UBS says the dearth of official U.S. data means corporate earnings are now the most visible and accessible metric of the state of the U.S. economy.

"And the news flow on that front remains largely supportive," says Alvise Marino, foreign exchange analyst at UBS.

He notes U.S. earnings are beating estimates by 7.8% in aggregate and 78% of companies outperforming projections.

"The path of least resistance seems tilted towards further modest USD upside for now, with the low end of our EURUSD 1.14-1.18 range a near-term potential target," says Marino.

Driving a run of successive daily gains by the dollar against the euro was last week's Federal Reserve decision and guidance that was light on commitments to follow up with another interest rate cut in December.

Investors are anxious that the Fed will skip a cut in December, which is reflected in lower stock markets and safe-haven demand for the dollar.

"This story is not just one of dollar strength but also a rotation away from GBP and EUR, in favour of safe havens. Under performance in global equity markets continues to be a factor behind the market’s general risk-off tone and bias towards defensive positioning," says Charles Porter at SGM Foreign Exchange Ltd.

Euro-dollar peaked at 1.1918 on September 17 and has steadily lost value since, reaching a low of 1.1468 today. It is guided by a descending trendline and technical analysts are on alert for a test of the big July support zone at 1.14 being tested soon.

However, we reported on Wednesday that a growing theme in our research inbox is that the dollar's recent run of strength is about to turn.

"One can't help but feel the greenback’s run may be nearing the end," says Fawad Razaqzada, Market Analyst at City Index.

"We believe that U.S. rates investors may be done reassessing their dovish Fed outlook for now. The latest rally in U.S. rates and thus the USD may start losing momentum," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Marino at UBS says that "at face value, this could imply that the USD upside push from the repricing of Fed policy might run out of gas soon, absent new catalysts."

For those who lack a catalyst, that's missing in action.