Strong U.S. Dollar Weighing on Dollar-Denominated Commodities

The U.S. Dollar is also be supported by the divided Fed and several key Federal Open Market Committee (FOMC) members who suggested last week that the central bank may have to hit the pause button on an additional rate cut at the end of October.
James Hyerczyk
U.S. Dollar Index

Commodities and currencies finished lower on Monday, which is likely the result of the extremely strong U.S. Dollar. A rising dollar tends to drive down foreign demand for dollar-denominated assets like gold and crude oil. This, and other factors likely contributed to their more than 2% declines on Monday. A favorable interest rate differential driven by improving U.S. economic data and the increasing chances the Fed may pass on an October rate cut also made the U.S. Dollar a more attractive asset.

A weaker Euro was primary responsible for the dollar’s gains against a basket of currencies. This is because the single-currency represents 57% of the dollar index.

Euro Falls on Weak German Inflation Data

The Euro fell to its lowest level in 28-months against the U.S. Dollar on Monday as concerns about Euro Zone growth weighed on the single-currency, while the greenback benefited from a seasonal demand and uncertainty arising from the U.S.-China trade war, German annual inflation unexpectedly slowed for a third consecutive month in September, data showed on Monday.

German Growth Forecasts Revised Lower

Germany’s leading economic institutes have also revised down their growth forecast for Europe’s biggest economy for this year, two sources with knowledge of their decision told Reuters on Monday.

Seasonal Demand for Dollars Rising

Demand for dollars heading into the last quarter of the year is also boosting the greenback. According to Bipan Rai, North American head of FX strategy at CIBC Capital Markets, “In Q4 we tend to see strong seasonal demand for the U.S. dollar, and given the fact that Euro/Dollar is the most frequently traded pair in the foreign exchange market, that certainly means that we could be seeing some further downside in the Euro going forward.”

Safe-Haven Demand for Greenback

Some of dollar’s strength is being attributed to safe-haven buying due to uncertainty around the outcome of an impeachment inquiry into President Donald Trump and general nervousness ahead of the start of trade talks between the U.S. and China on October 10-11.

Divided Fed May Mean No Rate Cut in October

The U.S. Dollar is also be supported by the divided Fed and several key Federal Open Market Committee (FOMC) members who suggested last week that the central bank may have to hit the pause button on an additional rate cut at the end of October.

In September, the Fed cut interest rates for the second time in two months, but the latest forecasts of Fed officials showed just how divided they are on the need for future rate cuts. Five wanted deeper cuts, five didn’t want any cuts and another seven were happy with the Fed’s action.

Last week, Fed Vice Chair Richard Clarida said U.S. inflation expectations are currently in line with the central bank’s 2% goal, and indication that he does not see a pressing need for new rate cuts to boost inflation.

Also last week, Dallas Fed President Robert Kaplan said even though the world economy was going through a “fragile” period, odds of a U.S. recession over the next year remain “relatively low.”

Outlook

Generally speaking, as long as the U.S. Dollar remains strong, dollar-denominated assets like gold and crude oil are going to have a hard time finding foreign buyers, which should keep a lid on gains. Furthermore, the widening of the spread between U.S. Government bond yields and other major government bond yields in Germany, the U.K. and Japan, will also continue to make the U.S. Dollar a more attractive asset.

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