The U.S. dollar finished the week stronger against both the euro and the British pound (GBP), gaining from the stabilization of stocks in the U.S. as well as increasingly stronger economic data and investor fears of continued market turmoil abated.
These factors were however not sufficient to sustain the dollar against the Japanese yen as it lost ground with the yen looking more like a safe haven and the dollar behaving like a risk asset.
Notwithstanding its weakness against the yen, the WSJ Dollar Index (BUXX -0.11%), which measures the dollar against a basket of rival currencies, was up by 0.2% at the end of the week to read at 88.48.
The dollar has been on a bit of a rollercoaster ride as conflicting reports have appeared regarding the timing of the long awaited hike in interest rates. The dollar weakness started with the release of the minutes of the July Federal Reserve meeting which seemed to indicate that the Fed would be delaying any rates hike beyond its September meeting. Fed vice chairman Stanley Fischer said they wanted to see more evidence that inflation was growing at the desired 2% before committing to an interest rate hike.
The annual Jackson Hole, Wyoming economic symposium, which deals with important economic issues facing the U.S. and other world economies with participants from the Fed and central bankers from around the globe, took place from 27 - 29 August and was addressed by Fischer. In an apparent turnaround, he said the door was still open for an interest rate hike provided stability returned to the markets.
Investors are very sensitive to any issues that might affect dollar values such as an interest rate hike and the suggestion from Stanley Fischer that the “door was still open” was enough to make the dollar more attractive to foreign investors. Higher interest rates, which would increase the return on assets in dollar denominated investments, supported the dollar strengthening on Friday following Fischer’s comments.
While the yen might currently claim pretender status as a more desirable safe haven than the dollar, a study by Sergei Afontsev, an eminent Russian economist who is an advisor to the EU-Russian Industrialist Round Table amongst many other economic advisory positions, thinks otherwise as illustrated in a paper entitled Domination of the Dollar: Are There Any Alternatives?
He makes the point that the of the four leading international currencies, the USD, euro, GBP and the yen, the use of the USD in international financial markets far outstrips the other three. Quoting statistics from the Bank for International Settlement, which show that the USD served 87% of forex transactions, the euro 33.4%, the yen 23% and the GBP 11.8%, he underlines the importance of the greenback (All currency transactions involve 2 currencies so the total turnover is 200%).
Afontsev restates the importance of the USD as the major global currency with a double status, the favored currency for global settlement and the international reserve currency of choice for global central banks.
The dollar, while it might fluctuate, should remain in a tight range until the Federal Reserve actually makes the decision to hike the interest rate.
Fawad Razaqzada, a technical analyst at Forex.com said, “The dollar has been rallying for a good few months and now that momentum has been lost because most of the good news for the dollar has been priced in.”
MT4 Chart: EUR/USD