Has the U.S. Dollar Peaked?
''For the past 2 months, the US dollar has been on a tear. However, despite hitting multi-month highs against sterling, the Australian, New Zealand and Canadian dollars, at the end of last week, the cracks began to show.
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, 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, USD 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.
There are a number of forces pressuring the US dollar lower from profit taking, the drop in US stocks, the slide in US yields to President Trump’s relationship with the rest of the world. The US’ trade war also puts pressure on the markets and the US Supreme Court’s ruling that state sales tax can be collected from online retailers is bad news for stocks.
Yet one very strong reason why investors won’t stop buying US dollars is the upward trajectory in US rates. Week after week, US policymakers go out of their way to remind everyone that interest rates are on the rise. At the ECB forum in Portugal last week, Fed Chair Powell started his speech by saying the case for continued gradual rate hikes is strong. He also expressed his confidence in the labor market and inflation. Most importantly, Powell said as is US policy is still accommodative because rates may be 100bp under their neutral level.
So US rates won’t peak until the middle of next year, which would be the time when many central banks are just beginning to tighten. This provides the fundamental basis for the ongoing uptrend in the dollar and a reason why investors will be looking to buy and not sell the dollar (particularly USD/JPY) when it falls.
Now back to the question of whether it is time to sell dollars – in the week ahead, we see scope for a further correction which could give short-term traders an opportunity to fade recent moves. In the long term, unless something significant changes from an economic or political perspective that leads investors to believe the Fed will raise rates by another 25bp instead of 50bp this year we won’t see a significant drop in the greenback.''