The Dollar Is Going To Get Stronger

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Forex Weekly Outlook March 30-April 3 – Will U.S. Dollar Rebound After Rough Week?

The CORVID-19 outbreak has paralyzed the global economy and led to sharp volatility in the currency markets. In the upcoming week, we’ll get a look at manufacturing PMIs in China and the U.S, British GDP as well as U.S. nonfarm payrolls.

The Bank of Canada slashed rates from 0.75% to 0.25%, as major central banks continue to ease policy in order to stabilize the financial markets. British CPI dipped from 1.8% to 1.7%, while German and eurozone services PMIs pointed to sharp contraction.

The U.S. dollar was broadly lower last week, following a staggering figure for unemployment claims, which hit 3.2 million. This was due to the shutdown of many factories and businesses across the country. GDP for Q4 showed a 2.1% in the third estimate, confirming the previous estimate.

  1. German Preliminary CPI: All Day. German inflation came in at 0.4% in February, matching the forecast. The estimate for the initial March reading stands at 0.0%.
  2. Chinese Manufacturing PMI : Tuesday, 1:00. The CORVID-19 outbreak caused a massive slump in manufacturing in February, as the PMI plunged to 35.7 points. This was down from 50.0 in January and well below the estimate of 45.1 points. The index is projected to improve to 44.9, which still points to contraction.
  3. UK Final GDP : Tuesday, 8:30. Economic growth rebounded in Q3 with a gain of 0.4%, after a decline of 0.2% in Q2. However, the estimate for Q4 stands at 0.0%, which points to a lack of growth.
  4. Eurozone Inflation: Tuesday, 9:00. The final reading for January CPI came in 1.2%, confirming the initial estimate. The initial estimate for March stands at 0.8%.
  5. Canadian GDP : Tuesday, 12:30. Canada releases GDP on a monthly basis. In December, the economy grew 0.3%, its best month since April. Will the upswing continue in January?
  6. US ISM Manufacturing PMI: Wednesday, 14:00. The last two readings have been just above the 50-level, which separates expansion from contraction. However, the index is expected to slow to 46.0 in the upcoming reading.
  7. U.S. Employment Reports: Friday, 12:30. Wage growth is expected to dip from 0.3% to 0.2% in March. Investors are bracing for a rare decline in nonfarm payrolls, with an estimate of -81 thousand. The unemployment rate, which was 3.5% in February, is expected to climb to 3.8%.
  8. US ISM Non-Manufacturing PMI: Friday, 14:00. The services sector has looked strong, with the PMI continuing to post readings well above the 50-level. However, analysts are braced for a sharp slowdown in March, with an estimate of 48.0 points.

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US dollar forecast: Preview for the main foreign exchange events that will rock currencies ► focusing on major events and especially on publications in the USA, moving the US dollar (greenback). Here are some general data. Scroll down for the latest US dollar outlook

USD and forex general characteristics

The United States Dollar is the reserve currency of the world, partly due to its use in settling oil prices and other commodities. Foreign exchange pairs are divided into majors, minors, and crosses. Both majors and minors include the USD.

US economic indicators and political developments influence currencies more than anywhere else in the world. The decisions and statements by Federal Reserve officials make the biggest waves. The US economy is by far the largest in the world. US politics and policy also have an outsized impact on currencies.

The outlook consists of mostly US economic events but also key market-moving figures from other major economies. The euro-zone, the UK, and Japan stand out.

Recent USD Moves

The greenback suffered a bad start to the year: poor growth and scandals hurt the US dollar. Hopes for fiscal stimulus faded with the repeated failures to repeal Obamacare. Despite two rate hikes in the first half, the dollar struggled. Other economies outperformed America.

The second half already looks a lot different: economic growth reached 3% annualized and the Fed seems to stick to its plan to hike rates three times. In addition, Trump’s tax plan inspires markets, despite hurdles to pass it before Christmas.

Headwinds come from the political scandals. Low inflation also weighs on the dollar. If the “mystery” persists and wages do not accelerate, Janet Yellen and co. could refrain from further tightening. The new Fed Chair Jerome Powell will take office in February 2020, and he may not stick to the current plan of raising rates three times.

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Dollar Strength and Why It’s So Strong Right Now

Three Reasons Why Now Is a Great Time to Travel Abroad

The U.S. dollar is strong when the dollar’s value is high relative to other currencies compared to the past. This means one of two things. It can mean the dollar is near the top of its historical range. As measured by the DX.F, the all-time high for the dollar was 163.83 on March 5, 1985. That’s because the U.S. Federal Reserve raised the fed funds rate to 9% to combat stagflation. The historical fed funds rate reveals the ups and downs since 1971.

The record low for the dollar was 71.58 on April 22, 2008. This was shortly after the Bear Stearns bank failure. At that time, investors fled to the euro because they thought the financial crisis was limited to the United States.

A strong dollar can also mean that the dollar rate increased over a short period. The dollar strengthened 25% between July 2020 and March 2020.

Why the Dollar Is So Strong Right Now

The dollar is so strong for three reasons. First, the Fed ended its expansive monetary policy as the economy improved. It stopped adding to the money supply. This constrained the supply of the dollar and increased its value.

The Fed also raised interest rates in December 2020. This strengthened the value of the dollar. It meant that U.S. Treasury notes would attract higher interest rates in the short-term. That increased the demand for dollars. Savers earned a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.

Second, the European Central Bank lowered the value of the euro by doing the opposite. Political instability in the European Union also weakened the euro. The euro to dollar conversion and its history shows how the euro has fared against the U.S. dollar through the years.

The dollar automatically strengthens when the euro weakens. That’s because the euro makes up 57.6% of the value of the U.S. dollar index. This means that whatever makes the euro weaker will make the dollar stronger and vice-versa. Each of the other currencies in the USDX has less influence on the dollar’s value.

Finally, forex traders intensified the strength of the dollar. They used leverage to further weaken the euro and strengthen the dollar.

This is the timeline of what happened from 2020 through 2020.

2020: In January, the Fed began tapering its quantitative easing program. The dollar remained in its 2020 trading range of around 80 for the first six months of 2020. Similarly, the euro traded at around $1.3767. In February, the pro-western forces in Ukraine overthrew its government, sowing seeds of the Ukraine crisis. In March, Russia annexed the Crimean peninsula in Ukraine. In April, it sent forces to support pro-Russian separatists in eastern Ukraine. In March, the Fed announced as well that it would look at raising the fed funds rate sometime in mid-2020.

On September 4, the ECB announced it would begin its version of QE. In November, the ECB added it would maintain low interest rates.

In December, the euro fell to $1.21, as investors feared the Greek debt crisis would force Greece out of the eurozone. As a result, the dollar strengthened to 90.03 by the end of the year.

2020: In January, the ECB announced it would begin QE in March. On March 12, it started buying bonds. The euro fell to a 12-year low of $1.0524 on March 13. As the euro fell, the dollar rose. The USDX hit a 52-week high of 100.390 on March 13, 2020. The dollar rose 25% from its July 11, 2020, low of 80.187. It closed the year at 98.01.

Throughout 2020, analysts predicted the euro would fall to parity or $1.00. As a result, hedge funds and other forex traders began shorting the euro. These included Bridgewater Associates, Tudor Investment, Brevan Howard, Moore Capital Management, Caxton Associates, and the Gavea Fund.

International investors know how to short the euro in order to profit from its potential devaluation. Traders who shorted the euro sold them on the spot market. This meant they promised to buy them in the future to replace the currency they borrowed from their forex brokers. They hoped the value of the euro would fall during that time. If so, they pocketed the difference as their profit.

Another factor driving the strength of the dollar in 2020 was a slowdown in China’s economy. Potential credit problems scared investors into the safe haven of the dollar. As the world’s second-largest economy directly pegs its yuan to the dollar, China influences the U.S. dollar immensely.

In December, the Federal Open Market Committee raised the fed funds rate to 0.25.

2020: In January and February, the Dow fell to 15,660.18. It reacted to higher Fed interest rates. Investors didn’t like falling oil prices, the devaluation of the yuan, and the turmoil in China’s stock market.

Australian dollar continues to fall with more to come

There are four big reasons why the Australian dollar has been falling, with plenty of indications that the decline isn’t over yet.

The falls to below the US69c mark are fantastic news for Australian exporters but not so good for overseas holidaymakers and for consumers buying imported goods.

On the investment side, the declining dollar has boosted returns for Australians who have offshore investments due to the valuation rise

So, what is pushing the Aussie dollar lower?

Interest rates pushing the dollar down

In a direct way that reduces the relative attraction of investing in Australia versus other countries.

If you can get a risk-free return of 3% in one country and 2% in another, the higher interest rate is more desirable and all other things being equal, it will enjoy more foreign investment and a stronger currency.

Slowing growth cuts the currency

We may have just come through an election in which Australia’s “strong economy’’ was a major selling point but it has become increasingly apparent that things are actually quite crook here.

Australia’s latest growth figures have been the weakest since the GFC, with the economy up just 1.8% in the year to March.

Even that number is boosted by immigration and government infrastructure spending, which has kept the numbers positive.

In per capita terms growth has been negative for three quarters.

Lower growth is also a disincentive for foreign investors who want to put their money where growth is strong and sustainable.

Iron ore boom finally decouples from falling dollar

One of the factors that has been keeping the Australian dollar stronger than it might have been has been the booming iron ore price.

Australia holds a dominant position in the world seaborne iron ore market through companies such as BHP, Rio Tinto and Fortescue Metals and having such a strong export performance increases government tax revenue and is an attraction for foreign investors.

However, the Australian dollar has now decoupled from the iron ore price.

While iron ore has been trading around five-year highs above US$110 a tonne, the dollar has been falling.

Many forecasters are looking past the current tight iron ore market in China to falling Chinese steel mill margins which eventually will need to be improved by either lower raw material prices or even higher steel prices.

Out of those two possibilities, lower iron ore prices seem the most likely, with some iron ore bears seeing the price falling to US$80/t by the end of this year.

Interest rate direction differentials

It is not just falling interest rates that have been pushing the dollar down – it is also the emerging divergence in the policies of various governments.

One strong example has been the relationship between the Australian dollar and the Japanese Yen – with larger relative losses compared with other major currencies as Japan is seen to be in a stronger relative position.

While it is true that Japan still has an incredibly accommodative monetary policy with official interest rates at negative 0.1%, it’s still holding interest rates steady while Australia is widely expected to cut at least once and possibly twice this year.

It is a similar interest rate differential with the US.

While the US Fed has signalled that it is open to cutting rates, Australia is seen as more likely to cut rates earlier.

That is particularly the case since a string of US economic numbers that have been stronger than expected, including retail sales, consumer spending and core retail sales.

That makes it much more likely for the US to delay cutting rates until there are more signs of weakness in their economy.

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