A Strong Dollar Is Damping Demand for Reserve Currencies

Monday’s trading began with the strengthening of the US dollar as investors await Janet Yellen’s speech and the possibility that the Fed will toughen monetary policy this fall.

This gave a boost to the Asia-Pacific region: the weakening of the Japanese yen, which is trying to break through 114.24 in the pair with the US dollar, drove the majority of Asian indexes up.

Japan’s Nikkei 225 closed up 0.76%, regaining some of its losses and displaying a continuing upward trend. Hong Kong’s Hang Seng was up 0.63%, and South Korea’s Kospi remained almost unchanged, adding 0.09%.

The worsening of China’s June consumer price index took a toll on the majority of China’s stock indexes. The Shanghai Composite fell 0.17% on the fact that the CPI fell more than expected by -0.2%.

The European stock market welcomed the strengthening of the US dollar: although the energy sector is now in the red and oil is trading at November 2016 lows, the euro and pound sterling continue to weaken, which will make stocks more attractive for investors.

The EUR/USD pair is trading below 1.14, heading toward 1.1375, while European indexes remain up: the composite Euro Stoxx 50 settled up 0.58% during trading, and Germany’s DAX and France’s CAC 40 were up 0.53%.

The pound sterling likewise continues to weaken: Trading slightly below 1.2875, it continues its path to 1.285, attracting British investors to the FTSE 100, which strengthened 0.38% locally during trading.

Brent crude is trading slightly above $46.65 as the dollar continues to rise, and some OPEC+ member countries have started talking about analyzing the possibility of leaving the agreement. This is another factor in oil’s decline, as the global glut and the rise in US production are making the situation worse.

Like oil, gold continues to decline: the strong dollar is damping the demand for commodities and reserve currencies, which is causing pairs, such as the GBP/USD and EUR/USD, to fall and the USD/JPY pair to rise. Gold is behaving like the euro: Trading at $1211/oz, it is tilting toward relative equilibrium with strong support at $1210.

Yuri Prokudin, Olymp Trade analyst

Olymp Trade Review