Market Overview

Despite some correction of the U.S. Dollar index from 101 to 100 points, more factors seem to be pointing towards the further strengthening of the Greenback rather than for its decline, and the recent drop may be rather distinguished as a correction to the upward trend.

These factors are:

1. Expectations for a steeper angle of interest rate hikes by the Federal Reserve (Fed). Investors are considering the 96% probability of a 50 basic point interest rate hike from 0.5% to 1.0% to be announced the May 5 meeting. Furthermore, interest rates are expected to be raised after every Fed meeting this year and reach 2.5% by the end of 2022. This would increase the Dollar-denominated assets’ yields, and consequently this would lead to the strengthening of the Dollar.
2. The clearing of the Fed $9 trillion balance sheet by selling bonds worth $100 billion each month may sharply limit the Dollar supply, and again may lead to a strengthening of the Greenback.
3. Higher economic growth in the United States compared to other developed nations and low unemployment may increase Dollar-denominated investment perspectives.
4. Rising geopolitical tensions tend to boost the demand for “safe haven” assets, and the Greenback is one of these.
5. Other major central banks are less inclined to tighten monetary policy than the Fed, this makes their currencies less attractive.
6. Many trade partners of the United States have a positive trade balance and are more concerned about weaker national currencies than the U.S. Dollar. They win more by exporting more to America than from receiving imports from the country. This is true for Eurozone, China, Japan, Switzerland, Australia, and New Zealand. As the United States has less exports than imports, it is less likely to be negatively affected by the strengthening of the Dollar compared to other countries which have less imports than exports.

So, most market players, from investors to central bankers, are keen to see the strengthening of the Greenback. This may be less beneficial to the stock market because it would suffer from rising interest rates, expensive lending, low profits, and less funds to be invested in stocks. However, the above-mentioned factors are more that the negative ones and this could point to more possibility of the Dollar strengthening

Technically, there could be a strong upside for the U.S. Dollar index if it breaks through the 101 points resistance level. In this case, it may reach the 2017 and 2020 highs at 104 points.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.