Chart Book | Chart of the day: Dollar faces headwind

Foreign exchange developments have stepped into the sentiment spotlight. In Asia, the Japanese yen has taken a leg lower against the US dollar, with the break above 105 seeing the greenback reach levels last seen in 2008 and opening the way for a retest of 110. Foreign exchange volatility is on the rise, along with the dollar. In the medium term, relative interest rate expectations suggest a continued period of strengthening in the dollar. In the near term, however, optimism is beginning to look overstretched, as shown in the sentiment barometer index. A strengthening sentiment headwind may mean optimism on the greenback meets resistance as the US dollar index tests 2013 highs (84.9 marks a retracement of its fall in 2010-11). The dollar may be due for a near-term pause for breath.