Recent US Dollar Performance The US Dollar has experienced a prolonged and material decline in 2017. The DXY index has dropped from 102.80 (2nd January)
The US Dollar has experienced a prolonged and material decline in 2017. The DXY index has dropped from 102.80 (2nd January) to 91.33 (8th September), which roughly represents an 11% loss.
This decline has come in 7 consecutive monthly black candles, an extremely rare occurrence and a substantial move for a major currency such as the USD. Let’s now try to determine what the main drivers of USD weakness have been.
Firstly, US economic data has started to disappoint. Following a strong stint in 2016, this year has seen many hit-and-miss indicators. GDP and unemployment are still robust, even though the quality of jobs has deteriorated and the labour force participation rate is at 40-year lows. The main problem for the Fed, however, is persistently low inflation. CPI remains stubbornly below target with no real indication that it will turn higher. Janet Yellen now finds herself in the difficult situation of delivering rate hikes into a weakening economy with low inflation, knowing full well that more tightening will further put on the brakes.
Secondly, it’s been common knowledge that Donald Trump favours a weak Dollar policy. His administration has confirmed this and he himself often criticises other countries (mainly China) for pursuing a weak currency policy. The US has already joined the currency war with the other major economies in an effort to make exports more attractive and is likely to continue to do so.
Thirdly, sentiment and positioning on the Dollar had been bullish for a long time, and near record bearish on US Treasuries. Positioning has taken a while to reverse and this has kept the pressure on the USD.
At this juncture, what do we think is next for the Dollar? The medium term picture remains bearish as US fundamentals deteriorate. However, it’s most likely that there will be a bounce in the near term, potentially significant in magnitude. There are two main reasons for this argument:
In conclusion, we believe that the US economy is going to continue to stall and the USD will suffer more as a result. The 50% retracement of the 2001-2008 drop (87.26) may well be tested eventually but it’s likely that we will first see a sharp bounce towards 96 as shorts get shaken off and positioning returns to more “normal” levels. Risk/reward is now looking quite favourable for entering short-term long USD positions vs. some major currencies which have recently outperformed, such as the EUR, JPY and CAD.
This article was written by one or more of the following contributors: Blake Morrow, Nicola Duke, Grega Horvat, Steve Voulgaridis and Stelios Kontogoulas. They are all analysts at ForexAnalytix which provides macro & technical analysis for various financial instruments. Forex Analytix primary goal is to educate traders of all experience levels and to provide a wide range of tools which can help with their trading decisions.