Dollar growth possible targets and timing

17 February, 2020

The dollar index closed last week above 99.0, in the three-years peaks area. After touching these levels in September-October last year, the US currency reversed downwards for several times. But this time we will likely see further strengthening of the dollar’s index in the 100-103 area, which will mean a return to the peak levels of 2016-2017. Back then, the dollar index was in the 13-year highs for a little longer than a quarter but soon began to decline.

There is a similar story with the most popular FX pair – EURUSD. After a decline of below 1.0880, it returned to April 2017 levels. From the current levels, the next major downside milestones are 1.0730, 1.0500, 1.0340.

The first mark will close the gap in the pair formed after news on France elections when risks of ultra-right Marine Le Pen coming to power has disappeared. The second mark represents the last round psychological level before the euro and dollar parity. The third is the lower point of the pair in January 2017, when the euro was sliding down on low volumes in the first days of the year.

A decline below 1.0340 will potentially return the pair to 2002 levels. These were the times when the ECB supported EURUSD in the first years of the life of the single currency. At that time, the level of confidence around euro-project was low.

From the fundamental point of view, there are no particular obstacles to the decline of the single currency now. In the 4Q19 the eurozone economy slowed to 0.9% YoY, compared to 2.3% for the US. A long list of comparisons of data not in favour of the eurozone includes inflation, employment growth rates, the scale of the slowdown in industrial production, growth rates in the services.

A wide range of data suggests that the ECB needs a massive policy easing to make it consistent with Fed policies. All these arguments are in favour of the further growth of the dollar. But there is also an argument against it: Trump.

The US president repeatedly and publicly spoke in favour of monetary policy easing, intended to weaken the dollar and through this to support exports. According to the available comments, the exchange rate issue was actively discussed in the US and China trade negotiations, and now it may become one of the crucial cornerstones in the US and EU negotiations, which Trump has outlined for this year.

There have been precedents in US history when the whole world was forced to support or at least not to prevent the weakening of the dollar. There were interventions by European central banks in the early 2000s and the Plaza Accord in the 1980s, not to mention the abandonment of the gold standard in the early 1970s, which also triggered the weakening of the dollar.

History suggests, however, that the dollar weakening has been benefiting the world economy, whose growth rates increased in response to the markets’ desire to put dollars into work, rather than storing them in Treasury Bills. So the US administration may have arguments to convince Europe and the rest of the world to stop the dollar’s appreciation when it seems excessive.


Source  
Dollar in danger of losing reserve currency status29 Jul, 2020  

Goldman Sachs Group Inc. put a spotlight on the suddenly growing concern over inflation in the U.S. by issuing a bold warning Tuesday that the dollar is in...

U.S. pressure could accelerate growth for markets in Greater China11 Jun, 2020  

U.S. pressure on Chinese stocks looks set to accelerate the growth of capital markets in Hong Kong and mainland China, as investors remain intent on chasing...

Second wave of coronavirus could make Fed rethink negative interest rates15 May, 2020  

Another "big setback" in the U.S. economy could prompt the Federal Reserve to consider cutting interest rates into negative territory - but such a monetary...


Markets are excited about oil price rally too soon8 May, 2020  

Oil prices rallied for five consecutive days this week amid investor optimism over the relaxing of coronavirus lockdowns in the U.S. and around the world...

Gold has "growing potential" to break $18005 May, 2020  

Gold prices could "break the highs" seen earlier this year, after declining in March along with assets across the board, according to UBS Investment Bank's Joni Teves...

US oil prices are on track for their worst day ever21 Apr, 2020  

U.S. oil prices were on track for their worst day on record on Monday, with crude storage facilities filling rapidly as the coronavirus pandemic continues to crush demand...


Coronavirus crisis will erase nearly a decade of oil demand growth15 Apr, 2020  

The International Energy Agency (IEA) said Wednesday that it expects the coronavirus crisis to erase almost a decade of oil demand growth in 2020...

Key U.S. coronavirus death projection revised down to 600009 Apr, 2020  

Some 60,000 Americans could die in the coronavirus pandemic, a university model often cited by U.S. and state policymakers projected on Wednesday...

Coronavirus likely ended record U.S. job growth6 Apr, 2020  

The U.S. economy likely shed jobs in March, abruptly ending a historic 113 straight months of employment growth as stringent measures to control the coronavirus...