The dollar is facing a technical correction and the index is below the overbought zone. The downward movement was the reason for new forecasts about the further positioning of the US currency. Where is the greenback headed?
Today, traders focus their attention on Jerome Powell's speech and macroeconomic releases evaluating retail and industrial production indicators. The number of buyers of the US dollar has declined significantly ahead of some important events. However, the dollar should maintain most of its gains.
ING economists view the current stock market recovery and dollar decline as a break in the established recent trend rather than a sustained shift in traders' sentiment and reversal.
The experts wrote that they expected further strengthening of the bearish steepness of the US yield curve slope and a rise in 10-year US real yields to 100 bps in the coming months. They noted that that issue would continue to pose a challenge to equity and credit markets.
April retail sales and industrial production should produce positive results. Fed Chairman Jerome Powell and St.Louis Fed President James Bullard are likely to mention again that the central bank has just started its tightening cycle to fight market expectations of tightening.
Investors are curious about Powell's views on the recent sell-off in risky assets and its possible effect on the Fed's future plans. The officials have not expressed any concern about these issues so far. On the contrary, they continued to support further tightening of financial conditions. Moreover, the markets are also focused on the size of the central bank balance sheet and the possible peak in inflation.
The dollar could strengthen slightly on Wednesday amid this news. Today, a consolidation is likely. If the dollar further declines, the level of 103.40 may change. In case the greenback breaks through this area, the index will move further and reach a level of 102.35. The dollar is expected to find strong support there.
Further bullish sentiment is also expressed by Bank of America economists. The US currency will continue to rise in the coming weeks. Moreover, there are at least three reasons for that.
The first reason is divergence in US monetary policy. European and Japanese regulators will try to catch up with the Fed. However, this process will be very gradual. The ECB will start to tighten its policy later this year if that. However, it will not be sufficient to reverse the dollar index.
Secondly, the dollar will stimulate expensive energy supplies amid the Ukrainian crisis and possible EU sanctions on Russian energy imports. This fact will exert strong pressure on the euro.
Thirdly, China's deep concern about Covid-19 and a weaker yuan has caused the country's imports to decline dramatically in annual terms. It could become negative in the coming months.
Controversial aspects of strong dollar
Previously, a strong dollar would produce positive effects under different circumstances. The growth of the US currency should have regulated the world economy. Weaker nations could boost exports while reducing inflationary pressures in the United States by lowering the cost of imports. Currently, the situation is the opposite. A significant and rapid rise in the greenback (nearly 10% since the start of the year) may undermine the global economy, which has become stagnant in recent years, and destabilize financial markets.
The politicians have not made any attempts to fight the strong dollar so far. However, they have identified this problem. Moreover, countries already dealing with high risks of economic, energy, food and debt crises may face serious consequences.
Will the Fed be able to control the dollar? In the current situation, the US regulator will have difficulties with previous market liquidity concerning bloated balance sheets and inflation problems.
The countries that consider risks of a strong dollar can reduce them in their own ways. They will need to carry out structural reforms to improve economic growth and productivity, increase returns on capital and make their economies more resilient. This process is gradual, which means they will have to bear the burden of a strong dollar.
Global restructuring is underway, and a strong dollar is likely to be a main source of economic and financial instability.
