What the F$%$ is happening with the USD?
The US Dollar. The world currency. The one driver of every market out there as it is the most widely traded currency and most accepted currency on this planet. As of late, it seems to be doing some INSANE tricks so let’s dive into a fundamental and technical look as to why everyone is losing there minds at the movement lately!
The value of the dollar has declined dramatically since the early 20th century due to inflation. Inflation can be caused by three devices: more printed currency making each dollar less valuable, when demand rises OR when there are constraints on supply. The value of the dollar increased 28% between 2014 and 2016 but by 2018 it had fallen another 14%. But why does this have such an effect on the dollar?
Inflation is necessary for an expanding economy. When the Federal Reserve keeps low interest rates this stimulates spending and drives demand. In turn, this leads to economic growth. With the growth in the economy since the 2016 election it is a safe assumption that the dollar will ultimately lose value.
There are incredible correlations that you can use within the foreign exchange market to capitalize on this loss of value. Gold and the Japanese Yen are considered safe havens when investors speculate a loss on the American dollar so the end result are stronger valuations in gold and the Yen while the dollar will fall. You would have seen this in the past week with the surge in gold. The central bank in Japan uses the the dollar to purchase US Treasuries. This practice keeps the dollar’s value higher relative to their currencies so given the appropriate market conditions we can see a major inverse correlation between the Yen and the dollar. One can also speculate the cryptocurrency will also fall into this category as it is seen as an alternative to fiat currencies altogether.
Technically speaking, basic price action on the DXY weekly chart shows us exactly why we are seeing a huge spike in US based pairs. We encountered a bear market for the DXY in 2017 around the 104.00 level and continued down into the low 88’s until the beginning 2018 when a sudden surge began the present corrected movement.
The bullish liquidation began to present a reversal pattern at the 92.37 mark and continued until the 97.87 high from June of 2017 where it failed to break, maxing out at 98.33. From here we saw a massive bullish impulse that broke out of the channel. As of now, we can expect a small consolidation from this movement and a continuation to 95.03 before we see any sort of fight from the bulls.
This entire movement pales in comparison to the highs of the early 2000’s where the dollar reach the 120 handle. We are still in a state of liquidation from that impulse and we are seeing signs of a continuation on a much larger scale than the weekly timeframe.
If you are fond of trading any USD pair please trade wisely and trade carefully. We can look at historical data all we want but at the end of the day no trade is certain. Trade what you see and use proper risk.