US Dollar Demand Declines On Renewed Investor Optimism

US Dollar Demand Declines On Renewed Investor Optimism
November 2, 2018

 

Following an overnight rally in Dow Jones and Nasdaq, Asian stock markets rallied today morning, reflecting the return of risk appetite, relief and confidence about future trade talks between China and the US. Japan’s Nikkei (NIK) was trading at 22,184.53, up +2.35% from the previous close. Likewise, Shanghai Composite SHCOMP gained +2.20% to trade at 2,667.15. The gains were led by stocks related to insurance companies and brokerage firms.  In Hong Kong, the Hang Seng Index (HIS) was up +3.59% in the morning hours. Other prominent indices in South Asia Singapore (STI), Malaysia (FBMKLCI)  and Indonesia (JAKIDX)] were all up. As the risk appetite increased and confidence returned in the equity markets, the demand for safe haven currencies such as the greenback fell. The US dollar index, which measures the strength of the greenback against a basket of major currencies, slid 0.8% to 96.16. Notably, the index peaked at 97.20 on Wednesday, the highest level since June 2017.

 

US dollar may be peaking

Surveys are showing that US consumers were this confident on two previous occasions, at the peak of the economic growth in the 1960s and 1990s. Notably, the sentiment is optimistic across income groups and not only among the wealthy. Five years before, small businesses were not as confident as they are now. The misery index, introduced in the 1970s to define the combined negative impact of inflation and unemployment, is presently 6%, equaling the lowest levels of the past 50 years.

Among developed economies, only the US has grown significantly in 2018, while Japan, Europe, and many emerging economies have slowed down considerably. During the third quarter, the economy expanded at a rate of 3.5%, making it the best year of growth in more than a decade.

However, of late, the US stock market, which generally rises when investors expect strong economic growth, has turned extremely volatile.

Investors are expecting the turbocharged American economy to peak after a hot decade. The US economic growth has continued undeterred for nine years in a row. It is the longest economic expansion on record.

Unfortunately, a decade after the financial crisis of 2008, the US companies have already started accumulating debts again. Total corporate leveraged loans have reached an alarming level of $1.6 trillion globally, far higher than the dubious records set before the 2008 crisis.

More importantly, the loans have ballooned after the White House walked back a stringent Obama-era policy that discouraged high leverage. It should be noted that most of the loans discussed above were disbursed in the US.

It is common to see even large enterprises getting overconfident and accumulate debt beyond their servicing capacity. However, it is unusual to see the government follow similar lines, as it has happened this time. The tax overhaul in December has increased the US budget deficit to approximately 4% of GDP, matching the immediate aftermath of a war or recession.

The situation has made it hard for the US government to sustain the near overheated economy. Economists expect the growth to slow next year when the impact of the tax cuts recedes, and the strong dollar starts affecting exports. The Fed has been consistently raising rates, and this is expected to have an impact on the housing markets.

The US stock market is now 60% larger than the American economy, a level it has hit only twice in the past century – during the 1920s and late 1990s. The considerable tech enterprises, which are at the forefront of the robust economy, are already facing a regulatory backlash that could have a negative impact on their high-profit margins.

The U.S. mid-term election verdict could set the direction for both the equity market and the currency market. Until then, the demand for the greenback is expected to remain subdued.

The Euro, on the contrary, is gaining against the dollar, primarily due to the latter’s weakness. Additionally, the news of a tentative Brexit deal between the EU and the UK is also aiding the Euro’s rally against the dollar. However, the standoff between Italy and the EU will hamper the Euro’s uptrend against the US dollar.

Technically, the EURUSD currency pair has made a double bottom at 1.1315 levels. The stochastic indicator is rising from the bearish zone. Furthermore, the next minor resistance is expected only at 1.1520 levels. As a result, we can expect the Euro to gain ground against the greenback in the days to come.

usd - technical analysis - 2nd November 2018

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

 

Janine

Janine

Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be


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