DOLLAR RALLIES TO A FOUR MONTH HIGH -- MOST MAJOR CURRENCIES ARE DROPPING -- THE EURO IS THREATENING CHART SUPPORT -- A STRONGER DOLLAR COULD SIGNAL GLOBAL INVESTORS ROTATING BACK INTO U.S. MARKETS -- BUT COULD BE NEGATIVE FOR COMMODITY PRICES
DOLLAR INDEX NEARS TEST OF EARLY OCTOBER HIGH...While recent volatility in stocks, commodities, and bonds has received a lot of attention, currency trading has been relatively quiet. But that may be changing. Chart 1 shows the Invesco US Dollar Index (UUP) climbing this week to the highest level in four months, and nearing a test of its early October high. There could be several reasons for the sudden preference for the dollar. Money often flows into the safer U.S. currency (along with U.S. bonds and stocks) during times of global uncertaintly like the recent outbreak of the coronavirus. Reports of a stronger U.S. economy this week may be helping as well. So might today's front page story in the Wall Street Journal that the U.S. trade deficit narrowed in 2019 for the first time in six years. While exports declined -0.1%, imports fell a much sharper -0.4%. That shrunk the overall deficit by -1.7%. The biggest drop in imports came versus China. The bottom line is that the lower trade deficit is usually good for the dollar. That's because foreigners are buying more from us than we're buying from them. That creates a demand for U.S. dollars. Today's announced plan for reduced Chinese tariffs on some U.S. goods may also be boosting the dollar. What matters most, however, is the simple fact that the value of the dollar is rising. While major foreign currencies are falling.
FOREIGN CURRENCIES IN DECLINE...Three foreign currencies declining against the greenback are shown below. Chart 2 shows the Canadian Dollar falling sharply since the start of the new year largely owing to the big drop in commodities like oil. Canada is a big commodity exporter. Chart 3 shows the British Pound in danger of falling to the lowest level in two months. Tough negotiations with the EU over the recent Brexit breakup may be weighing on sterling. Chart 4 shows the Japanese yen nearing the lowest level since last spring. The yen got a safe haven bounce during the second half of January, but is slipping again. Those three account for about a third of the value of the Dollar Index. And the currency with the biggest influence on the dollar is in danger of breaking important chart support.
THE EURO THREATENS ITS NOVEMBER LOW...The Euro accounts for 57% of the value of the U.S. Dollar Index shown in Chart 1. That gives it the biggest influence on the direction of the greenback. Chart 5 shows the Euro in danger of slipping below its November intra-day low. If it does, that would give a bigger boost to the UUP. Why does that matter? A stronger dollar would suggest that global money is once again flowing back into safer U.S. financial markets. The U.S. stock market has held up better than foreign developed and emerging markets during the coronavirus outbreak; and is the first to reach a new record. Buying of higher-yielding Treasury bonds has also attracted foreign capital.
WEAKER FOREIGN ETFS... A stronger dollar could reduce the appeal of foreign stock ETFs that are quoted in the U.S. currency. Weaker foreign currencies cause dollar-denominated foreign ETFs to lag behind local benchmarks.
A HIGHER DOLLAR IS BAD FOR COMMODITIES...Another possible casualty of a stronger dollar could be commodity markets, and stocks tied to them. Since commodities are priced in dollars, a higher dollar usually results in lower commodity prices. A stronger dollar could make it more difficult for commodity prices that have fallen recently to make up that lost ground. A stronger dollar is also a potential negative influence on the price of gold.
