Pressure on dollar is increasing

15 January, 2018

Pressure on dollar is increasing

USD dollar opens a new week under pressure, being at record low levels. The dollar index is currently traded at 90.25 points, the level last seen on the market in 2015.

Investors speculate on the global economic growth in recent months and accompanying moves by central banks in Europe and Japan to normalize monetary policy after years of expansive support. While the European Central Bank and the Bank of Japan continue to support their markets, the overall market is getting stronger expectations that the world's largest regulators will soon weaken support and stimulus measures and eventually join the Federal Reserve in raising interest rates.

This potentially makes the dollar less attractive to investors who for many years have invested in US assets, mainly US government bonds in search of low but still above market yields. While the industrial Dow has risen to record levels along with many world stock markets, in recent months large US indices have lagged behind foreign benchmarks, which indicates that market interest is gradually shifting to other developed stock exchanges.

The decline in the dollar is the last argument for many investors who expected the currency to grow, as the Fed will continue to gradually increase interest rates. Recently, the decline in the dollar was slow and stable, and the last growth was a technical correction and ended with a new decline despite the surge in inflation and stable data on US labor market.

Recent data on US consumer price index on Friday did not cause a rally in dollars, while the increase in yield of treasury bonds in recent weeks has not had a significant impact on the currency as well.

Many analysts believe that the fall of the dollar in 2018 is likely to be accelerated by the US tax bill, which is expected to expand the US budget deficit. The dollar tends to fall when the deficit widens, which in part reflects the country's growing demand for bond sales to close its funding gap.

Goldman Sachs and J.P. Morgan analysts expect that the US budget deficit will grow to 1 trillion. or 5% of GDP, in 2019 from 664 billion dollars. The USA in the fiscal year 2017, which ended in September, or about 3.4% of GDP.

But some investors fear that a prolonged fall in the dollar may shake the faith in the US economy, which causes concern about high prices in the stock market and complicates the Fed's efforts to raise rates. A quick fall can also spur fears that inflation will rise above the moderate pace that politicians and investors hope for.

The focus of the markets this week will be data on inflation in the euro area, which are extremely important for the European Central Bank. Good data can further increase the expectations of the markets about the imminent curtailment of the asset purchase program, which the European Union's financial regulator continues to implement.

In the US this week there is not rich in important economic events. Today in the United States is a day off so the market likely to be traded with reduced liquidity. The most important event of the week in the States, probably, will be the publication of the Fed's Beige Book on Wednesday.

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