Fundamental Analysis: Weekly Dollar Roundup

Fundamental Analysis: Weekly Dollar Roundup

The dollar has made some losses this week overall against various currencies. Data has mostly been slightly worse than expectations. However, the main factors were ongoing trade disputes between the USA and China combined with losses by American shares. Changing yields of American bonds also played a role.

The euro made strong gains yesterday around noon GMT. Today EURUSD has held consistently above $1.12 for the first time this month. USDJPY was hit even harder, reaching three-month lows below ¥110. The Aussie dollar has also made a small overall gain above 70 US cents, and even the pound seems to have halted losses above $1.30.

Trade tensions at the center this week

Across almost all markets, the Sino-American trade war has been the most important fundamental driver this week. Since last weekend’s tweets by President Trump announcing higher tariffs to start today, risk appetite has diminished significantly. The S&P 500, Dow Jones Industrial Average and Nasdaq 100 have all made losses this week.

Downward movements by American shares and indices affect the dollar negatively because lower demand for shares means lower demand for dollars to buy them. Generally, losses for shares also indicate a less positive outlook for the American economy.

Higher buying of relatively safer American 10-year bonds against equivalent shorter term assets has caused 10Y yields to continue their decline. The figure is now around 2.44%, close to 18-month lows, another signal of lower appetite for risk.

Data and the Fed taking a back seat

American data this week mostly missed expectations slightly, but releases generally had limited effect on forex symbols. The figure today for annual inflation at 2% is only 0.1% lower than the consensus. The USA’s trade deficit also grew by a mere $700 million in March based on yesterday’s data.

A number of senior members of the Federal Reserve System have been speaking publicly this week. However, none of them have had any major effect on the value of the dollar. The Board of Governors’ Lael Brainard commented earlier this afternoon GMT on the USA’s slow recovery from the global financial crisis. Dr Brainard referred to upcoming data from the Fed on weak growth in wages and financial pressure on America’s middle-income families.

Eyes on talks and Twitter ahead of next week’s data

Donald Trump’s latest slew of tweets on trade and China have increased nervousness among traders. This means that the focus might remain on the president as well as the negotiations into next week.

Traders are also going to be analysing the tone from Chinese leaders and what their reaction might be to the latest tariffs. Talks are ongoing in Washington; no tangible results are likely anytime soon, though.

Regardless of whether Mr Trump is serious or trying a tactic for negotiation, next week’s data is also important for the dollar. Monthly retail sales at 12.30 GMT on Wednesday is usually a key release for USD. Property data is due at the same time on Thursday.

More losses possible for USD into next week

On the whole, fundamentals are against the dollar in the short term. This is particularly true for symbols like USDJPY and USDCHF. However, USD’s losses against non-havens are likely to be small given the effect of rate differentials.

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