The US Dollar Slows Down, Approaching 14-Year Peak
The US Dollar has slowed down its steady climb as it nears its 14-year peak against a basket of leading currencies. Interest in the currency seems to have flagged slightly Wednesday in what can only be termed a pause for reorientation. Investors brought the currency’s longest rally in four years to a halt as trading closed before the holiday for Halloween.
The greenback had begun to fall on Monday after rising for 10 sessions in a row. In fact, the last time it had had such a winning streak was in May 2012. The US Dollar Index had touched its 13-and-a-half year high on Friday at 101.54 but was last trading at 100.98. It had hit a low on Tuesday at 100.65.
The recent investor confidence in the US Dollar has mostly been triggered by Donald Trump’s election to the post of President. While most people seem to have been caught unprepared by Hillary Clinton’s defeat, investors have rallied around the greenback very quickly in the expectation that the Trump administration will boost fiscal spending and reduce taxes as part of much needed efforts to boost the country’s economic growth.
Investors are betting on the fact that the Federal Reserve will increase interest rates in December in order to control inflation that the boosted growth rates will inevitably result in. As a matter of fact, a reliable tool places the odds for an interest rate hike at 95.4% at present. Investors looking for a high yield on their money will definitely be attracted to US dollars if interest rates are high. The Federal Reserve will be meeting on December 13th and 14th and there is immense interest in what the outcome will be.
Various other factors point to increasing demand for the US dollar. Home sales have increased this October to reach their highest levels in almost a decade. The residential construction business is also gearing up to meet the increased demand for housing. However, it remains to be seen whether this demand can be sustained in the long term and whether it will play a role in the currency’s value vis-a-vis other major currencies. If mortgage rates were to increase then the desire to invest might decrease slightly.
The dollar had touched a six-month peak at 111.35 yen on Monday but this had eased slightly to 110.96. The euro also performed slightly better after dropping to its 11-month lows of 1.0568 vis-a-vis the dollar this past Friday. It rose to finish at 1.0633. Interest in the Euro is cautious given that some of Europe’s biggest economies will be going in for elections in the next few months.
The British pound reacted to its government’s budget statement by dropping in value against the dollar, finishing at 1.2410. Industry analysts are expecting an increase in borrowing in preparation for the country’s departure from the European Union.
The dollar’s steady climb upwards has been tempered by a reduction in 10-year U.S. Treasury yields. Satoshi Okagawa, Sumitomo Mitsui Banking Corporation’s senior analyst based in Singapore, pointed out that the benchmark Treasury yields had dropped from Friday’s level of 2.364% which was a one-year high to close at 2.319% on Tuesday. Okagawa explained that interest in buying dollars had abated in response to the drop in returns from the bonds.
It is clear that Donald Trump’s win has increased expectations from the US economy, irrespective of all the bad press that he has received (and continues to receive) for a long time. The world is following the political developments there with great interest and is particularly interested in finding out how much of his election rhetoric will Trump actually follow up on.