"At last, a dollar trend appears to be developing. This month, the dollar has rallied against almost all currencies including emerging market ones. The broad trade-weighted dollar is close to its post-2008 highs last seen at the turn of the year.

Undoubtedly what has helped is a monetary policy divergence story between the Fed and its peers...One factor that could further bolster the dollar would be a Clinton victory, not least because it would bring about continuity in economic arrangements between the US and the rest of the world.

As for currency pair specific dynamics, we find that euro-area investor repatriation flows, especially in equities, appear to be coming to end, while bond outflows continue. This dynamic has been a stubborn support for the euro for much of the past year, but is unlikely to be so in the future. On the yen, we expect Japanese institutions to reduce their hedge ratios as hedging costs are higher than before. There are also more signs that Japanese investors are buying foreign equities. A less-discussed factor is the decline in Chinese buying of Japanese assets, which may well have been part of a reserve rebalancing programme earlier in the year. It likely helped yen strength over that period, but as with euro repatriation, this flow will not be forthcoming.

Consequently, there is scope for dollar strength to lead to the euro heading to its 2015 lows of 1.05 and USD/JPY rising to 110 - its level before the market gave up on the Fed in June".

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