But to gather facts in a politically charged investment environment is not an easy task. We made it simple so you can get multiple perspectives and go directly to the sources of opinion. In our office, we read all the material published at FXStreet. The US dollar is still the global reserve currency, so in economic uncertainties people rush to dollars in a large degree considering it a safe-heaven.
The dollar can also act as a funding currency - when times were good people would sell borrow in dollars and invest in higher yielding assets, but when global economy starts to fall apart those dollar short positions are unwounded, and the dollar rallies. A strong currency increases the appeal of a country's bonds and stocks for foreigners.
For an American investor, a weak dollar increases the appeal of foreign bonds and stocks. Currency markets play an important role in the intermarket picture because all asset prices have to be seen in relative terms not only in absolute terms. The thing is, we haven't seen any real follow through and until the stock market collapses, that argument won't even get a chance to prove itself.
I have contended that the combination of Fed policy normalization and what should be a fall in stocks, will invite a massive way of safe haven flow that ultimately benefits the US Dollar. It still could happen, but at this point, I am concerned that there could be risk for a period where the US Dollar correlated with stocks on the way down.
This is hitting yields of longer dated Treasuries and as shorter dated yields hold up, is significantly flattening the yield curve further. With markets speculating that Trump may appoint Jerome Powell, who is seen as a dove, to become the next Fed head, bears could make an unwelcome appearance.
It should be kept in mind that a dovish Fed Chair has the ability to weigh on the prospects of higher US interest rates in , consequently pressuring the dollar.
It is true when the Sep Fed minutes note that market-based inflation expectations have remained stable recently. But equally, they have remained stable at a lower base relative to historic levels; the 5y5y US breakeven inflation rate remains around bps below its pre average, while even the Fed's latest Primary Dealers survey that participants on average are looking for US inflation to average around 1. The lack of inflation premia suggests that bond yields are set to stay structurally lower for longer.
Goldilocks is here to stay! If this results in significant market volatility, the Fed may opt to defer a rate hike into China announced the creation of an oil futures contract open to international traders that will be denominated in Yuan and convertible into gold.
Persistent low Inflation has been a problem for the Fed and this could be reflected in a lower average on the dot plots which could reflect a shallower tightening cycle, especially if the terminal interest rate is reduced from 3. This would hit the dollar. The resignation of the Fed Vice Chair, Stanley Fischer, is likely to be playing a significant role in keeping the dollar under pressure.
His departure leaves four of the seven Board of Governors' seats vacant, meaning that Trump can reshape the Fed's policy, if he decided to bring more doves into the central bank. It's probably still too early to start speculating, and we will have to wait a little longer for clarity, when Trump nominates new governors.
However, Fischer's resignation will remain a negative factor for the dollar in the weeks and months to come. There are no shortages of reasons why the dollar should be trading lower ranging from a potential North Korea nuclear crisis, the upcoming debt ceiling debacle, Friday's surprisingly weak labor market report and the impact that it will have on the Federal Reserve's plans for monetary policy for the rest of The figures for June and July were also revised lower, whilst the unemployment rate ticked higher.
The softer reading on Friday was even more surprising given the strong ADP private payroll data and the solid reading to the jobs element in the ISM manufacturing report. Whilst one weak month by no means constitutes a trend, the softer figures have created more uncertainty surrounding any potential moves by the Federal Reserve regarding another interest rate rise by the end of the year. Reduced clarity of potential Fed action is doing little to abate the problem of runaway euro strength;.
What explains DXY's drop and Queen Yellen's regulatory comments is seen in the rise of the money supply. Despite 3 raises since December , M1 and M2 continues to climb. Rather than sit idle, monies were put to work in money markets.
A few points in interest rates is all it takes to profit and grow more money. The US dollar enters a new bear market phase—the US dollar index topped in January and has looked quite sickly for months despite the fact for many of those months the Fed seemed as if it would be the only central bank in rate hike mode. Now we have the European, Canadian, and UK central banks in the game and the US dollar will likely give back its rising yield spread. Couple that with money flow potentially heading out to the commodity-based countries and you have the making of a big push lower in the dollar thus bidding up dollar price of real goods as most are still denominated in US dollars.
Yellen and company continue to focus on normalizing policy, the risk of a recession rises, with potentially bearish implications for the US dollar and US stocks. There's absolutely nothing going for the US Dollar. If you thought the Fed was going to raise two more times this year, those hopes took a serious blow last Friday in the aftermath of the very unimpressive US employment report which not only was soft but also showed a major disconnect between the impact of artificial Fed support and the impact on the real economy.
Well, when you have an unemployment rate at super low levels of 4. The fact that wage growth has barely budged should be a major concern for the Fed. The only comforting thing about it is the fact that it will keep the Fed from raising rates some more and really panicking the market. When placed against the international backdrop of rising inflation, economic growth, and pressure on central banks to tighten monetary policy in the Eurozone and UK, for example, any hesitancy by the Fed in extending its own rate hikes could compound the pressure on the dollar.
It is more than double the amount of USD the Federal Reserve added to the market on a quarterly basis during its recent stint of quantitative easing. This effect has mitigated the increase in interest rates on the back of the Federal Reserve preparing the market for a rate hike tomorrow. Hence, while the Federal Reserve has tightened monetary conditions in Q1, the US Treasury has eased monetary conditions.
Maybe the plan is dead. The greenback qualifies, and the recent decline coincides with more protectionist talk coming from the Trump administration. So is there reason to believe the U. At first blush, the answer would be no, as the U. However, there are developments of concern: The first has already happened. A second change is under consideration: If passed, it could have profound implications on how issuers around the globe get their funding The recent weakness in the buck could be attributed to a variety of factors — a deceleration of US economic data, a rocky start of the Trump administration that has created fears of instability amongst investors and the still rather cautious tone from the Fed.
But perhaps the biggest reason for the correction in the dollar has been the stall in US interest rates. With fixed income markets no longer exuberant about the prospect of US growth the dollar has lost its primary catalyst for appreciation. Until rates perk up, the greenback is likely to remain subdued. It seems the strong dollar policy, overt or covert, is now about to be ditched as Trump starts ruffling a few more feathers. On balance, many of the comments from Trump officials have expressed concern about the strength of the dollar or, as Navarro, complained about other currencies being undervalued.
Sustained expansion should expedite the termination of the current reinvestment policy. The Fed will have to choose between a gradual reduction in reinvestment or a complete termination. There are benefits to shrinking the balance sheet instead of raising the policy rate.
Such an action might tend to weaken the dollar, which could spur exports and boost factory activity. In the global context, a depreciation of the dollar would reduce pressures on countries with fixed exchange rates and external debt. While further Dollar selloffs may be expected as markets scale back on fiscal stimulus speculations, the prospects of higher US interest rates this year should limit losses in the medium to longer term.
There may well be another factor contributing to the correction in the USD this year. In conjunction with a corrective fall in the USD so far this year, US Treasury yields have fallen significantly, Bitcoin has collapsed, CNY has been volatile, and commodity futures prices have jumped. All of these moves may relate to Chinese government efforts to clamp down on avenues for capital outflow.
Markets have high expectations about the changes in taxation, investment infrastructure and de regulation, but other issues like immigration and protectionism may be tackled too. Markets anticipated a much easier fiscal policy via lower taxation and higher infrastructure spending.
Will Trump be able to satisfy the high expectations? If he fails to do so, there is room for some further USD correction.
The other China problem is a trade war started by Trump that leads to Chinese retaliation. This is almost certainly going to happen. Trump may practice on Mexico first but it's one of the few campaign promises we expect him to keep.
The dollar is vulnerable to the very idea of a trade war and its prospects worsen as China starts talking about dumping Treasuries. The dollar doesn't need capital flows from China to contribute to its rally. It does need the second larg-est dollar reserve holder to maintain its holdings.
One of those big sticks is the threat of selling a big chunk of those dollar reserves. The announcement effect would trash the dollar fast, and probably hard.
We expect further USD strength in the short term, as markets continue to reprice and put in more risk premium into the money-market curve. At the same time, current account flows, valuation and positioning are supportive of the euro. Since most times cycle balances themselves out, we could be poised for the next 3 year cycle to be a stretched 3 year cycle just as the dollar is ready to begin its 15 year super cycle decline.
When it is no longer attractive to borrow in U. We think we have seen this dollar squeeze play out until the end of last year. The force may continue to play out, but other forces might be stronger. Some say that the dollar has to rise because U. In our analysis, real interest rates, i.
In this context, we see it is quite conceivable that the U. Fed nominee Jerome Powell's confirmation hearing got underway. The potential candidate indicated his preference for normalization of interest rates and maintaining that the Fed's balance sheet unwinding program.
With Jerome Powell getting the nomination for Fed chairman, Trump will have in place a Wall Street Fed chairman in line with his Wall Street Treasury secretary and Wall Street Council of Economic Advisers chairman, forming complete deregulatory trio and this is the reason why Wall Street keeps breaking all-time records and the US Dollar is back on the rise.
Analysts at ING explain that most G10 currencies registered a neutral bias on their weekly signal for positioning - suggesting that the reversal in the bearish USD positioning is starting to take hold. Richard Franulovich, Research Analyst at Westpac: Do not let this mislead you.
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