The dollar’s nonstop surge that saw it hit a 14-year-high last week is beginning to hit speed pumps. Will the greenback give up all the gains it has accumulated since early this month or what is happening is only a temporary response to gravity?
The dollar index pulled back 0.52% to 100.95 during Asian trading Monday. The index measures the strength of the dollar against six major rivals. The Monday decline of the dollar index continued the Friday’s loss.
Dollar rallied to multiyear highs amid growing expectations of an enlarged fiscal spending in the U.S. under the Trump administration in what has come to be known as Trumpoconomics. President-elect Donald Trump has proposed increased government spending on infrastructure projects as an economic stimulus. He has also hinted at offering U.S. corporations with offshore cash an opportunity to repatriate the money at a special lower tax rate of about 10%. The current tax regime would subject such repatriated cash to a nearly 40% tax penalty and that has been cited as the reason companies like Apple (AAPL), Alphabet (GOOGL) and General Electric (GE) with billions of dollars in overseas accounts have avoiding bringing the money home.
If Trump administration allows these companies to bring home their cash at a reduced tax rate, the reasoning is that the cash would go into hiring more workers domestically, increasing investment in research and development and expanding operations, all of which are expected to stimulate the U.S. economy. As such, investors have been buying the dollar on U.S. economic prosperity hopes under Trump.
The U.S. Federal Reserve, or the Fed, has also hinted that it could hike lending rates as soon as next month. Higher interest rates increases the appeal of U.S. yield-bearing assets, thus the strong demand for dollar as investors position themselves to take advantage of dollar-denominated yield-bearing investments.
What about the recent dollar decline?
The decline in the dollar seen last Friday and continued this Monday is largely seen by analysts as a consequence of profit-taking by investors who have seen their investment in the greenback soar in the recent weeks. Profit-booking is seen putting brakes on the dollar rally. But the pause or decline in dollar rally is expected to be short-lived as analysts say there is still much to push the greenback upward for the rest of the year.
However, a slowdown in dollar rally should bring reprieve in the bond markets and in the currencies of emerging economies.
However, this week is expected to be a little volatile for the dollar. Investors will be keeping their eyes on multiple U.S. economic data for clues on whether a December lending rates increase is certain. The U.S. payroll data, gross domestic product growth and manufacturing reports will be coming out later in the week. The Fed has recently cited mixed U.S. economic data in delay rate hikes and markets will be watching closely to see if the data will be strong enough to cause the Fed to move swiftly with a rate increase.
The OPEC meeting is also expected to weigh in on the dollar. Members of the oil cartel will be meeting this week to discuss production freeze as part of the efforts to stabilize crude prices that have been sliding for more than two years now. But OPEC members have their differences in areas such as which producers should curtail their output and by how much. Saudi Arabia and Iran have in the past OPEC meetings shown to be reading from different scripts on the matter of production freeze.
Italy’s constitutional referendum that could force the government to resign could also rattle the currency market, sparking Euro selloff and aggressive dollar buying.