US Bull Cycle Over?
The bull cycle in the USD index, which has run for around six years, has come under serious heat this year, mostly fuelled by resurgent strength in European and Canadian currencies. The fall-out from Trump’s election has also weighed heavily on USD as investors were once again left disappointed by Trump’s overpromising and under delivering.
However, the decline in the dollar has had some positives globally, reducing the capital outflow from China and other EM’s with the dissipation in concern for a hard-landing in China, bolstering the overall outlook in Asia. Alongside this, the pickup in European and Asian markets, with a drop in USD has strengthened commodity prices and fuelled a strengthening of economies in resource-producing nations and emerging markets which in turn has exacerbated the USD decline.
US Growth Improving, Inflation Still Lagging
The domestic picture in the US is mixed. Inflation has been heavily subdued for five months now, while expectations of large fiscal stimulus have faded and consumer confidence has failed to take off (September consumer confidence undershot once again). Consequently, interest rates and interest rate expectations remain low. However, if growth can continue to run at above 2% with nearly full employment, price pressures are likely to re-emerge, and the Fed can begin a faster hiking cycle.
Essentially, the US Dollar is waiting for indicators to once again reaffirm the robustness of the economy, most importantly a pickup in inflation. A resurgent US Dollar will clearly translate into lower European currencies as well as the currencies of emerging market and resource-producing nations. JPY should also slide against USD, if the main driver of a USD weakness is the risk-on conditions present in Europe, resource nations, emerging nations, due to pressure from the effective exchange rate.
Read more: https://www.orbex.com/blog/2017/09/usd-rebounding-sharply-against-pressured-jpy