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Will the Dollar Hit New Highs or Turn Lower in Q3?

  • Kathy Lien
  • 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. 

Spot Returns 25-29 June

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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