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The Dollar is gaining against its major rivals, helped by a notable "risk off" signal in US equity markets.

The USD rebound makes for a welcome return of volatility following days of increasingly tight ranges. The ascent pushes the Pound-Dollar and Euro-Dollar off their recent perches; both are down a third of a per cent on the day, with the former at 1.2643 and the latter at 1.0810.

Why is the Dollar stronger today? "The USD is stronger this morning, helped by a notable 'risk off' signal in U.S. equity markets. While European markets are mixed, US equity futures point to a very soft open, especially in the tech-heavy NASDAQ index," says Daragh Maher Head of FX Strategy at HSBC Securities in New York.

"USD strengthened amid mild risk aversion," says a note from Citi, which suggests investors are displaying caution ahead of Thursday's PCE inflation data and month-end. The catalyst for the retrenchment in risk sentiment is therefore not obvious and suggests it might have a limited lifespan.

Although the Dollar is 2024's best-performing major currency, Maher suggests the strength in risk appetite so far this year has acted as a headwind on the USD, "perhaps limiting the extent to which it capitalised on the hawkish shift in Fed rate expectations".

Money market pricing shows a steady reduction in the number of rate cuts anticipated from the Fed in the coming months, moving the market to be in line with the Fed's own projections.

"So perhaps equity market swings will become a more dominant part of the USD narrative in the coming weeks," adds Maher.

Above: The Dollar index, a measure of broader USD performance, at daily intervals.

He does caution that the USD’s relationship with risk appetite has become more mixed in 2024 as correlations between the DXY and the S&P 500 have converged towards zero rather than the deep inverse correlations evident for much of the last two years.

It therefore remains to be seen if this midweek price action "heralds a return of the previously reliable inverse relationship between the USD and equity markets," says Maher.