Unless you’ve been busy looking for another Game of Thrones leak, then you would have noticed that market players have taken to selling the dollar these days.
What’s up with the dollar’s downtrend anyway? Let’s explore the possible reasons why the Greenback is getting dumped like it was last week’s unicorn bagel:
1. Changing tone for the Fed?
FOMC members were all sunshine and rainbows over the economy last December when they unanimously decided to raise the Federal funds rate by 25 basis points.
And aside from pencilling in two to three rate hikes in 2017, Yellen and her team also upgraded their GDP, employment, and headline inflation (for 2016) forecasts.
Seven months and two more rate hikes later, some Fed members are already changing their tunes. Though they’re still all for reducing the Fed’s balance sheet, a few have already hinted that they want to wait before saying “yay” to another rate hike.
Recall that the Fed further downgraded its inflation forecasts in July, which belied its previous statement that the factors dragging prices lower were “one-off.”
This is probably why voting members Brainard, Kashkari, Kaplan, Harker, and Dudley have recently shared concerns over Uncle Sam’s consumer prices, with some of them hinting that they’d like to see improvements before they vote for another rate hike. Heck, even Yellen herself expressed more caution on inflation during her recent testimonies!
And then there’s the Trumponomics effect, which isn’t panning out as many had expected. See, the Fed’s December meeting minutes revealed that “almost all” members added “prospects for more expansionary fiscal policies in coming years” in their rosy projections.
Unfortunately, the Donald’s major projects have encountered one delay after another and have yet to stimulate the economy.
2. Rosier prospects elsewhere
The Fed’s increasingly cautious stance has prompted investors to look elsewhere for yield and, unfortunately for the dollar, other major assets have obliged.
We’ve already discussed how commodities and comdolls have gotten more attractive in the past couple of weeks.
Add to that China’s not-so-hard economic landing; tightening prospects from other major central banks; easing Brexit concerns, and even Bitcoin’s monster rallies and you’ve got yourself a mix of assets that look shinier than the Greenback.
3. Increasing geopolitical tensions
It wasn’t until prospects of a nuclear war with North Korea have increased that the Greenback’s selloff against fellow low-yielding currencies have resumed.
We all know that North Korea has been launching intercontinental ballistic missiles (ICBMs) to Japan, a military ally of the U.S., while threatening that it has the technology to potentially send missiles to U.S. shores.
Pyongyang’s nuclear activities have finally prompted the UN Security Council to vote 15-0 in favor of imposing $1 billion worth of sanctions on the hermit kingdom, a move that incited a word war between Donald Trump and Kim Jong-Un.
As they say, “Stick and stones may break bones, but a nuclear blast will just pulverize ya.” Okay, I made up the last part but words like “fire and fury the world has never seen” and vowing “thousands-fold revenge” tend to get the investors’ attention.
Though the leaders’ threats have yet to turn into actual nuclear attacks, market players have nonetheless dumped their higher-yielding bets in favor of the “safe havens” like the yen, franc, and gold.
Of course, it also didn’t help that decreased demand for dollar-denominated equities and lower government bond yields further weighed on Greenback demand.
4. Lack of fresh catalysts
The last but definitely not the least reason for the sustained dollar selloff is that there’s no major catalyst to break the Greenback’s downtrend.
Unless other major central banks suddenly change their biases, or we see headlines bigger than current nuclear threats to and from the U.S., then we’ll likely see the dollar extend its trends further in the next couple of days.
Will the dollar really continue dropping?
Not necessarily. For starters, the dollar has been falling against its major counterparts for weeks now, which opens dollar pairs to deep retracements (if not reversals) once forex bears have done their worst.
Tensions between the U.S. and North Korea could also recede in the next few days. After all, U.S. Defense Secretary James Mattis already shared that a nuclear confrontation “would be catastrophic” and that their current efforts are “gaining diplomatic results.”
And then there’s the start of September, which means traders returning from their vacations to buy dollar-denominated, higher-yielding assets.
That’s if we haven’t suffered “a shameful defeat and final doom” from North Korea by then, that is.