If you have been following the currency market over the past weeks, you would have noticed something that’s been quite a stable trend lately: a weak USD. After two years of fantastic growth, the American currency hit a rough patch at the end of 2017 and opened 2018 on a low note. Last week the dollar made some minor recoveries, but now it is back to declining again. What’s causing this and can we expect it to continue?
In order to understand where the US dollar might go, we need to know more about the factors which bring it up and down.
First off, the massive increase of the dollar since 2015 was to a large extent caused by a difference in monetary policy sentiments across the ocean. While the European Central Bank, the Bank of England, and the Bank of Japan, among others, were (and to an extent still are) keeping in place stimulus packages and low interest rates in order to increase inflation and heal the economy from the global financial crisis of 2008, the United States was feeling otherwise. The Federal Reserve was the first major central bank to start moving towards hawkishness as it began implementing a series of interest rate increases. This, together with the campaign promises by Trump to strengthen the American economy were among the main reasons for the growth of the dollar.
Now, we need to look at the opposite side of the coin: the USD’s vulnerabilities. In December 2017 the Fed raised interest rates again but the dollar didn’t get the boost it got from rate hikes in the past – why? The common explanation is that traders had already priced in the certain rate hike in the previous increases of the dollar, so the currency had nowhere to go. 2018 opened with lower US Treasury bond yields, which dragged the dollar down by suggesting that inflation might not reach the Fed’s targets, thereby preventing the central bank from implementing all three rate hikes planned for 2018. Furthermore, political instability in the United States has also proven to affect the American currency negatively.
Looking at the near future, so far we expect that the Federal Reserve would likely be able to keep its promise and at least increase interest rates during its March meeting. Earlier this week Janet Yellen led the last Fed meeting as chief – she will hand the reins to Jerome Powell who was officially recognized as the next Federal Reserve head. Powell is expected to continue with Yellen’s method of careful evaluations of the economic climate of the US before bumping interest rates. This is why inflation reports will be crucial this year: so far inflation hasn’t been going up with the other economic statistics from the US, causing the Fed some worry. If economic data is disappointing, the Federal Reserve might hold back on those rate hikes.
In addition, the White House itself has become a source of worry for the USD. Just last week news stories surfaced about President Trump trying to fire the special counsel who is investigating Russia’s meddling into the 2016 US presidential elections. This week he made the news again with his State of the Union address which glossed over many of the difficulties his administration has been facing. Meanwhile, the investigation about Russia’s involvement continues – every day is bringing us closer to a resolution on that front. Any development as this point has the potential to cause panic in US politics.
As you can see, the situation is quite complex – so many things are affecting the dollar, and the situation can change quickly, especially in terms of political events. Stay tuned to all news and announcements in order to make informed trading decisions.
