Will the Dollar Hit New Highs or Turn Lower in Q3?
- 2 July 2018
The second quarter is officially over and the US dollar was singlehandedly the best performing currency.
Between April and June, the greenback saw its value grow more than 5% against sterling and the New Zealand dollar. It also appreciated between 3 and 5% versus euro, Australian dollar, Japanese Yen and Swiss Franc. On a trade-weighted basis, the Dollar Index rose to its highest level in nearly 12 months wrapping up its best and first positive quarter since Q4 of 2016. As a consequence of these moves, the Australian dollar fell to its weakest level since January 2017 and the New Zealand dollar dropped to its lowest level since May 2016. The big question now is whether the dollar’s rally continues or it stabilizes and starts to turn lower in the third quarter.
To answer this question is important to recognize the 2 main factors driving the dollar’s strength in Q2 – the Federal Reserve’s 50bp of tightening and the US’ threat of a trade war. That threat has turned into reality with the battle expected to intensify in the third quarter. The Federal Reserve also plans to raise interest rates at least once and probably twice this year, so the forces dominating Q2 won’t go away in Q3. Political and monetary factors are very powerful drivers of currency movements and until there’s a hint of change, investors will keep buying US dollars. Now as often as President Trump changes course, this possibility should not be diminished.
The greenback pulled back against all of the major currencies except for the loonie. The move had little to do with US data. Instead few positive developments abroad triggered profit-taking on long US dollar positions. Although their recoveries were muted by the beginning of the week losses the best performing currencies last week were the Swiss Franc and the Japanese Yen. The worst performers were the Canadian and New Zealand dollars. Looking ahead with no major US economic reports to support the greenback, it is vulnerable to a deeper correction that could make pairs like GBP/USD and AUD/USD attractive buys and USD/CHF and USD/JPY attractive sells for the week ahead.
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