There is no more evidence of the strengthening of the US currency caused by the "hawkish cut" in interest rates ny the Fed last week. The decision of the American president to introduce new tariffs on Chinese products could lead to a dollar reversal, which seems to increase the chances for the Fed to cut interest rates already in September.
Donald Trump has complained about the strong dollar and the central bank for months. On the one hand, he said that other countries are weakening their currencies to make their exports more competitive. He meant China and the euro zone. Trump even suggested currency manipulation. On the other hand, the president of the United States did not like the Fed's policy. In his opinion, interest rates were raised too fast and too high. It seems that now Trump's criticism will come into force and he will be able to deal with the dollar and with monetary policy easing - all thanks to the escalation of the trade war.
The US currency has been losing strongly in the last three days. The major EUR/USD pair, has risen to the level from before the Fed's decision and is at the highest level from 25 July. This move may take place due to the significant increase in expectations for interest rate cuts by the Fed already in September. If the Fed knew what would happen 24 hours after the last week's decision, perhaps the statement would also be in a different tone. Now the currency market is adapting to the possible more easing of monetary policy in the US.
What's more, the contract for the US dollar index, which has recently reached the highest level in two years, in three days lost as much as previously gained in six. This only indicates the dynamics of movement. In addition, from the beginning of July, leveraged funds reduce their exposure to an increase in USD. It seems that there is a significant divergence when there is less and less willing to invest in the dollar along with its rising price. In other words, it seems that at these levels the dollar may no longer be an attractive investment.
US Dollar Index and leverage money net long positions. Source: tradingster.com
To all this comes the thread of a possible currency war that the US can start with China. If there was a new chapter in the conflict, its aim would be to weaken the USD, but probably not only to the Chinese yuan, but also to other currencies.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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