USD Extends Recovery from Four-Month Lows

Contrary to popular wisdom, the U.S. dollar declined sharply in the wake of the Federal Reserve’s March 15 rate hike. The decline culminated in fresh four-month lows for the USD currency after the Fed failed to inspire confidence in the health of the economy.

The pendulum has swung back in the opposite direction over the past week, with the USD trading at multi-week highs against a basket of other major currencies that includes the euro, yen, pound, franc, krona and loonie. The dollar index is up nearly 1.5% from its March 27 swing low and appears poised to extend gains back toward pre-FOMC levels.

In the process, the USD has rebounded against the euro, pound and Canadian dollar. Its recovery against the yen has been limited, with the greenback trading below 111.00 yen.

USDMonetary policy is a key driver of the currency markets. The greenback has gained over 20% since mid-2014, around the time the Federal Reserve began talking up the need to raise interest rates. After the November 8 election, the dollar soared to nearly 13-year highs, as the prospect of faster inflation raised expectations for more aggressive policy tightening.

The Fed raised interest rates by a quarter point last month, but made no changes to its economic outlook. Policymakers expect GDP to expand a mere 2.1% in each of the next two years before easing to 1.9% in 2019. These projections put the Fed at odds with President Donald Trump, who has vowed to grow the economy up to 4% annually.[1]

To put that in perspective, the U.S. economy has failed to grow even 3% annually for the past 11 years. Growth amounted to a meager 1.6% in all of 2016, which was one percentage point below the 2015 growth pace.

Trump has been a heavy-handed critic of the Fed, going as far as doubting its neutrality on political matters.

The dollar’s reaction to the FOMC rate decision reflected what we already know about currency trades – namely, that events are baked into the markets before they occur. In other words, investors buy the rumour and sell the fact.

On balance, the outlook on the dollar remains favourable, which can be a big problem for Trump, who would like a more competitive currency for trade purposes. The president has already criticized China, Japan and Germany for devaluing their respective currencies to gain an unfair advantage on trade. While a stronger USD currency may be good for yield-seeking investors, it is generally seen as a disadvantage for domestic manufacturers and other export-oriented industries.

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[1] Bob Bryan (January 22, 2017). “Trump is officially making an economic promise that will be nearly impossible to keep.” Business Insider.

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With over a decade of trading expertise and 100,000 fulfilled clients in 160 countries worldwide, easyMarkets will tick all your boxes whether you are a new or experienced trader, affiliate or introducing broker. Trade currencies, commodities, metals, vanilla options and indices from one place without the jargon, complicated offers and confusing terms! Welcome to the exciting world of trading. Welcome to easyMarkets.

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