What now for the dollar - momentum faltered? - BBH

Analysts at Brown Brothers Harriman explained that the Dollar Index rallied for ten consecutive sessions through February 14.  

Key Quotes:

"Despite a series of stronger than expected US data, and confirmation from the leadership of the Federal Reserve of rising confidence that full employment is at hand and that price pressures will rise toward the target, the greenback's momentum faltered.   

During the ten-day rally, the Dollar Index retraced a little more than 50% of January's decline, and the subsequent retreat saw it give back a little more than half of those gains.  It stabilized ahead of the weekend. Many participants are perplexed. They see constructive fundamentals, but a disappointed that the greenback did not sustain the upside momentum. They are not sure of the underlying trend, or if the trend is still higher, and many are not convinced the downside correction is over.   

It is our understanding of the macroeconomic fundamentals that anchors our view of the underlying dollar trend. One of our key fundamental considerations is the divergence of interest rates. The US premium over Germany in both the two- and ten-year tenors widened in recent days to the most this year and approached the extremes seen last December.

While we recognize that the BOJ's bond buying has slowed and that the ECB may taper later this year,  we do not see this as preventing a further widening of the US premium.  Moreover, the Fed funds futures market has two Fed hikes priced in but has only a little more than a quarter of a third hike discounted."