By: Christopher Lewis
The USD is an interesting currency. It is the world’s reserve currency, and as such there are a lot of markets that are priced in it. This creates a certain amount of demand no matter what is going on. This is one of the reasons that the most important currency for a forex trader to focus on is the Dollar. It simply affects everything.
For the remainder of the year, the Dollar will find itself being pushed back and forth as a result of several different forces. The USD should find itself getting a bid as the issues involving the European debt problems come to a head again this year. By default, people will flock to the USD, while leaving the Euro en masse. The Dollar will win by default.
However, let us not forget that the Federal Reserve is exiting the second round of “quantitative easing” in June. This means that the rates of the Treasury bills they have been buying should jump as they have been buying them up in massive quantities. The higher rates could attract more capital inflow into the US, pushing the Dollar higher over the long run.
Unfortunately, this won’t last forever. The USD will be punished as well since the supply of USD around the world is extremely high. Sooner or later the value of the Dollar will return to a falling trajectory as the fundamentals return to the markets. The USD will win for a while, but it will only be a matter of time before it falls over the longer-term again.
The commodity currencies could pick up a bid, but this won’t be if there ends up being a debt crisis in Europe. Traders tend to sell everything first, ask questions later. Because of this, the USD will gain against the AUD, NZD, and CAD – albeit temporary. As soon as the market calms down, it will realize that those economies are all strong, and their currencies will be undervalued at the time. The Euro will continue to lag behind the USD though.
The USD should gain against the Yen, but not because of fundamentals coming out of America. It will be because of all of the easing in monetary policy we will see coming out of the Bank of Japan. The central banks have recently been selling the yen as well – which should only help this theory.