Announcements 

Is King Dollar Poised for Another Leg Higher?

May 14, 2019

Is King Dollar Poised for Another Leg Higher?

The dollar index has been trending higher for several months now and could be gearing up for a fresh upside burst. The currency has likely benefited from recent U.S. tax cuts as well as government spending. Those tailwinds could potentially begin to fade, however, and the currency may need some fresh bullish catalyst to propel it higher.

The ongoing U.S./China tariff war could be such a catalyst.

Recently, President Donald Trump made a series of tweets that sent shockwaves through global markets. The President suggested that existing 10 percent tariffs on $200 billion of Chinese goods would increase to 25 percent. Not only that, but he also suggested that tariffs on another $325 billion of goods could be coming.

Although the news sent stocks sharply lower last week, the real carnage came when the benchmark S&P 500 index dropped over 48 points for a decline of 1.65 percent while the tech-heavy Nasdaq dropped over 159 points for a decline of nearly two percent. The CBOE’s fear gauge, the VIX, shot up to $19.32 for a gain of over 25 percent on the day.

Although the dollar did not do much, it could potentially see additional strength if investors continue to shed risk assets. A stronger dollar could potentially add to stock market woes, as a stronger U.S. currency makes U.S. equities relatively more expensive for foreign buyers.

A hawkish Fed could also potentially drive the dollar higher. At its most recent meeting, the central bank elected to hold rates steady at current levels. This did not come as a surprise. According to CNBC, the Fed did, however, alter some of the language from the March meeting statement to indicate that growth remains strong. With the jobless rate at 3.8 percent, around its lowest level in 50 years, the economy may still be expanding at a fast rate. Recent weak patches seen in the economy could potentially prove to be transitory and the Fed could adopt an increasingly hawkish approach if the labor market remains tight and if markets remain strong.

Despite inflation still running below the Fed’s desired 2 percent target, the Fed may now be less likely to cut rates. Even without any further rate hikes, the prospects for the U.S. economy seem to be far more optimistic than those of other countries. This, along with the potential for a significant flight-to-safety bid could keep king dollar on the offensive. An acceleration of the recent global economic slowdown could encourage even more bullish sentiment as there are few viable alternatives.

Whether you are just getting started in the markets or have an established business, Straits can help you achieve your goals and objectives. We pride ourselves on providing industry-best customer service, but our dedication to our clients doesn't end there. Click here to learn more about Straits and how we can be of assistance.

DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Trading commodity futures and options products presents a high degree of risk, and losses in excess of your initial investment may occur. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.