How long Can the Dollar’s Dominance Last?

Having dipped below 97.2 on January 31, the Dollar index is now trading above the 98.7 level. However, considering that DXY is now flirting with overbought territory in this current run, judging by its 14-day relative strength index, that indicates that it still the upward momentum may moderate in the immediate future.

Safe haven currencies in vogue amid coronavirus concerns

Persistent fears over the coronavirus outbreak have fueled the buying momentum for the Greenback, as investors find shelter in safe haven assets from the raging uncertainty. Since January 20, the US Dollar has strengthened against all G10 currencies, save for the Japanese Yen. Another bout of risk aversion over the near-term could be the catalyst that the DXY needs to hit that 99.0 line.

Powell’s testimony may dictate Dollar’s trajectory

Fed chair Jerome Powell’s semiannual monetary policy report before Congress today should help investors manage their expectations over the policy bias of the world’s most important central bank. With the Fed Funds futures pointing to a better-than-even chance of a US interest rate cut only in the second half of the year, such expectations should serve as a base for the US Dollar to explore more of its upside through the course of this month.

Considering the resilience of US consumers, who are being relied on to keep US economic growth momentum intact, the world’s largest economy appears to have solid enough foundations to mitigate its downside risks. Still, the US central bank may be called into action sooner-than-expected if downward risks stemming from the coronavirus outbreak feature more prominently on the US economic outlook. Any suggestion that a Fed rate cut is imminent could see the DXY unwind recent gains.

US economic fundamentals supportive of more Dollar gains

Looking further down the line, the recent release of US President Donald Trump’s $4.8 trillion election year budget could fuel expectations for more Dollar gains as investors expect potentially more fiscal stimulus in the pipeline, provided Donald Trump wins the November elections, of course.

Buoyed by the still-resilient US economic data, judging by this past Friday’s January US non-farm payrolls data, further signs of potential outperformance by the US economy compared to its developed peers, such as the European Union and the United Kingdom, could propel the Dollar onto more gains.

Written on 11/02/2020 by Han Tan, Market Analyst at FXTM

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