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What Should You Do if The USD Rallies Again?

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What Should You Do if The USD Rallies Again?

July 13 2015, 08.36am GMT


The world knows two safe havens in uncertain times, the U.S. dollar (USD) and gold, and it looks increasingly apparent that the USD is the more popular of the two.

Since the introduction of the euro (EUR) as the common currency for the European Union, it has joined the USD and the Japanese yen (JPY) as the most traded currencies. The last two years have seen China’s yuan also joining this elite group of currencies. The USD has outperformed this peer group of currencies for most of the past year for a variety of reasons.

During the past number of years, we have witnessed the economic crises facing a number of European countries such as Italy, Ireland, Portugal, Spain and topping the list of course is Greece.

The summit of European Union members which took place on Sunday and well into Monday morning has reached no firm conclusion and the uncertainty with regards to Greece remains.

Meanwhile, a number of Chinese government agencies have introduced a raft of measures, fiscal, monetary and legal, in an effort to prevent the selloff of shares and to maintain market values.

The Japanese government also introduced a number of monetary policy changes to stimulate growth in January 2015. A June report in Focus Economics says strong corporate profits, a weak yen and low oil are all supporting growth with an estimated GDP growth of 1.5% forecast for 2015. A weak yen of course means a comparatively strong dollar.

Without examining any U.S. domestic factors affecting the dollar strength, the state of the other major currencies are such that they will remain at current levels against the dollar in the short term.

The continuing positive data coming out of the U.S. such as unemployment rates, real estate markets, replacement and new as well as an expected growth in the GDP of around 2.5%,  also keeps the dollar ahead of its rivals.

Professor Eswar Prasad, author of “The Dollar Trap”, looks at the reasons for the dominance the dollar still enjoys despite the effects of the Great Recession. 

The bottom line is that in the aftermath of the financial crisis, U.S. policies and a dysfunctional international monetary system have served to strengthen the importance of the dollar.

He reaches the conclusion in his book that despite all the flaws, the dollar will remain the ultimate safe haven currency.

The technical charts, as broken down by analyst Greg Harmon, show that the dollar has been trading in a narrower range of higher lows and lower highs which typically precede a breakout. Putting this together with the fact that the dollar tends to move in seven year cycles and that we are now in the first year of such a cycle, the dollar is poised to strengthen further.

MT4 Chart: EUR/USD

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