Is the Dollar Ready to Decline?

Published on: 11/30/18 7:49 AM

Category: Uncategorised

U.S. dollar close to recent times high

The U.S. dollar index remains not far from 1.5 year highs, but has been showing some signs of tiring. The greenback has likely enjoyed significant benefit from the recent U.S. tax cuts and fiscal spending programs. Those tailwinds may be running out, however, and the currency could potentially be due for a significant reversal.

One of the biggest factors that has fueled buying in the dollar is rising U.S. interest rates. The Federal Reserve has already raised its key interest rate twice this year and is widely expected to hike rates once more before the end of the year. The Fed currently has another three rates hikes penciled in for next year as well.

Central Bank may change plans

The central bank may end up changing its plans, however, as the effects of rising rates are already being felt. The rising volatility and declines seen in equity markets over the last several weeks have been largely attributed to rising rates, and the notion of additional increases seems to be making investors very anxious. The Fed has drawn considerable criticism for its policy tightening, with U.S. President Donald Trump even weighing in on the matter.

Some analysts have suggested that the Fed is hiking too far too fast, and that the economy is not yet ready to absorb higher rates after a decade of ultra-low rates and QE. Some have suggested that the Fed not only avoid any further tightening, but that the central bank begin to cut rates again. The Fed is walking a tightrope for sure, with accelerating inflation and full employment to contend with. Any missteps by the central bank could have significant consequences for global markets. The selling and volatility seen in recent weeks could be just a taste of what’s to come if the Fed continues raising rates.

If the Fed elects to hold off on further rate hikes or if it decides to eventually start cutting rates again, he effects on the dollar could be dramatic. The greenback has risen in large part due to interest rate differentials and expectations across major pairs, and a sudden course reversal in U.S. policy could send the currency sharply lower.

What to expect

If stock market volatility continues to rise, the dollar may also see some selling as investors seek out the perceived safety of alternative currencies such as the Japanese Yen and the Swiss Franc. Any dollar weakness could also have a big impact on commodity markets, with dollar-denominated commodities likely seeing a big boost.