USD's recent decline can be put down to a number of affecting factors, including Trump's rearranging of the NAFTA agreement. This report discusses this and other reasons for the US Dollar weakening. The table below shows the difference you could have achieved when buying £200,000.00 during the high and low points of the past 30 days.
|Currency Pair||% Change||Difference on £200,000|
The question many of my clients are asking is why is the US Dollar devaluing, when reports are suggesting an increase in US interest rates throughout the year? The theory behind basic economics is that if interest rates rise, the value of the currency tends to follow suit, especially when a central bank hikes multiple times throughout the year. Nevertheless, in my opinion there are few reasons why the US Dollar is continuing to decline even with the interest rate outlook looking positive.
Firstly, the increased money supply which is being used in foreign markets around the globe (Q.E) is having a positive impact on the countries’ economies. For example, the Euro has gone from strength to strength over the last 12 months and I expect investors to continue to invest in Europe which takes investment away from the US. You can argue that this is the same for the UK and Japan also.
Secondly, the US is still seen as a safe haven currency, however the appointment of Donald Trump over a year ago slightly tarnishes that thought process. He’s made it clear he wants to reform most aspects of the US. One project he is working on at the moment is the NAFTA agreement which is the free trade agreement between the US, Canada and Mexico. As he is making constant change I believe the US Dollar is not a safe bet like it once was, and speculators are looking for returns on their investments elsewhere.
Lastly, economists are suggesting that the US is coming to the end of its cycle in regards to raising interest rates. They believe that once interest rates are hiked either two or three more times this year, the US will enter a period of low inflation and due to the higher borrowing costs, the economy will slow.
The points discussed above lead me to believe that even though interest rates are set to rise, the Dollar is set for a tough year ahead.
Throughout today, all at different times, William Dudley, Lorretta Mester and John Williams - all Federal reserve members will give speeches about the US economy and discuss monetary policy. Regular readers will be aware that FED members can have an influence on US Dollar exchange rates. With an interest rate hike likely for March, I find it difficult to see how the FED members can give anything away that provides strength for the US Dollar. However, if any of the three talks down the chances of a rate hike, I expect the US Dollar will devalue and therefore the Pound to make inroads against the US Dollar.
Next week there are a host of economic data releases which will have an impact on US dollar exchange rates. To start the week New Home Sales are released at 3pm. New home sales tend to have a direct correlation with other economic data releases such as retail sales. The theory behind it is that if people are buying properties, shortly after they will need to furnish those properties which mean an improvement in retail sales and consumer spending.
Tuesday afternoon Durable goods orders are set to show a major decline. Therefore, I expect the dollar to come under pressure Tuesday afternoon. Wednesday annualized GDP numbers are released at 1.30pm and later in the afternoon, new chair of the Fed Jerome Powell will give a speech. The annualised GDP numbers are set to show a decline which isn’t good news for US dollar sellers, and predicting Powell speech is difficult. Again, I don’t expect this to be a good day for the US dollar.
Looking at the data releases for next week, clients that are selling US dollars to buy pounds short term, I would suggest taking advantage today and not gambling on next week’s cycle of economic data.
For more information on how future data releases could affect your currency requirement, call our trading floor on 01494 725 353 or email me here
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