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.

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