Since 2014, the Dollar has increased by 25% against a basket of major currencies. After President Trump’s election, the value of the greenback has risen by about 3%, but his recent comment questioning the wisdom of maintaining a “strong Dollar” seems to have put pressure on the USD, which so far has been in the red in 2017.
USD Index EOD Charts
A strong Dollar hurts American export companies, making their products more expensive abroad and affecting their sales figures. Consumers could decide to turn to other less expensive, non-American products. Lower revenues for U.S. companies would then have a knock-on effect on employment, reducing hiring and even leading to redundancies.
Most of the companies listed on the S&P500 index generate more than 40% of their income abroad through foreign sales. President Trump seems to be a business-oriented president who wants to improve American competitiveness, especially in countries like China, and believes that a strong Dollar is proving counter-productive.
A strong Dollar, however, is a positive sign that investors have confidence in the currency and in the overall American growth outlook. In light of the President’s promised tax cuts, fewer regulations for business and major government infrastructure projects, the Dollar has, on the whole, been rallying since his victory on November 8th.
When a central bank raises interest rates, the currency of the country tends to increase in value. One reason for this is that more foreign capital flows in to that country, attracted by the prospect of better returns. When the Fed raised short-term interest rates by 0.25% in December, however, the USD actually fell.
Now that the Federal Open Market Committee has left the federal funds target range between 0.5% and 0.75% with further hikes said to be on the horizon, investors are asking whether the new administration will ultimately prove beneficial to the Dollar.
After a year of major geopolitical events, it’s likely that 2017 will also be defined by uncertainty and volatility in the markets.
With significant swings possible in the FOREX markets in particular, traders everywhere are awaiting upcoming economic events such as the release of the NFP report with special interest. Make sure you utilise all the tools available to you through online platforms like UFX.COM.
