What is Next for the Dollar?
What is Moving the Dollar?
The U.S. dollar has been on an upward trajectory for the entirety of this year. The dollar's upward strength has been propelled by the high demand for dollars. Much of the demand for dollars is rooted in the high interest rate environment that we have been experiencing. Interest rates are at these high levels to combat inflation.
Will this high interest rate environment continue, which will continue to push up dollar demand? Or will the Federal Reserve change the trajectory of interest rates and ultimately bring down demand for dollars?
Moment of Truth
The U.S. dollar is at a critical junction in its upward trajectory. You can see in the chart below how the price action of the Dollar Index is near a trending support level that has held up the currency for several months. Will we see a rebound off of this support level? Or will we see a breakdown? To answer this question, we must analyze what is moving the dollar.
Always remember that a rising dollar is generally bad for equities, and a falling dollar is generally good for equity markets.
Supply vs. Demand
Ultimately, just like most securities or currencies, supply and demand are the unseen forces that dictate price action of the dollar. When the Fed is raising interest rates or leading investors to believe that interest rates will be higher in the future, then demand for dollars will increase accordingly. The Fed is keeping interest rates high to keep inflation from running away.
Higher interest rates generally lead to higher demand for dollars. This is more apparent when you look at the charts for 10-year yields and the Dollar Index. The two charts look eerily similar. You can see these charts directly below. So, what will it take for interest rates to start falling?
Sticky Inflation
Inflation is the main culprit for the current high interest rate environment that we are in. We need to see inflation ease further in order to be confident that the Fed will lower interest rates in the future.
One of the main drivers of inflation is the price of energy, and more specifically, the price of oil. Climbing oil prices can exaggerate the effects of inflation. This indirectly affects yields as investors push treasury yields higher as hopes of rate cuts deminish. All this will push demand for the dollar upward. You could say that oil prices indirectly affect demand for dollars. This is why the chart for crude oil futures also looks eerily similar to the Dollar Index and 10-year treasury yields.
A Silver Lining
When you look at the chart directly above, you can see how the price action of crude oil futures is near a major inflection point. The price has just recently dropped below a trending support level that has propped up crude's price for several months.
This is the first sign that the strength in oil markets is diminishing. If oil's price continues to fall, then this will likely ease inflation. Then, maybe at that point, we can think about the Fed possibly cutting rates in the future.
Lower interest rates will lower dollar demand. A falling dollar is generally good for equities. So, in a sense, falling oil prices would be good for equity markets. Just not the energy sector.
Conclusion
As an investor in equities markets, I would love to see the dollar fall. This generally leads to more green days in equity markets. But for the dollar to fall, then we must see inflation cooling off further.
If oil's price begins to fall, then this would take away a lot of the pressure that has been adding to the inflationary economic data that we have been seeing. This would also take away some of the upward pressure in demand for dollars. This would be great for equity markets, in my opinion.
So what do you think, Moo'ers? Will we see the dollar drop below support, which should generally be good for equities? Or will the dollar rebound with inflation and put downward pressure on equity markets?
Good Luck Trading
As always, I am not a financial professional, and this is not investment advice. Be careful and be patient. Dont anticipate the market. Rather, participate in the market. Don't invest money that you can't afford to lose. Give some of your investments time and know when to cut your losses.
Don't be greedy. Don't invest in anything you don't understand. Don't put all of your eggs in one basket. Don't listen to the hype. Don't fomo or panic into or out of trades. Do your own due diligence. And just follow the trends. A trend is your friend. Good luck trading.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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Kevin Matte : Did you see that Saudi Arabia needs money and sold 15 billion US stocks?
here is the link: https://www.wsj.com/livecoverage/stock-market-today-dow-jones-05-24-2024/card/saudi-arabia-slashes-u-s-stock-holdings-by-15-billion-YEAossKqEm8QAZcFLxZv
SpyderCallOP Kevin Matte: I missed that headline. Thanks for the link.
That is a huge amount of money to take out of any investments.
Do you know why they did this? Did they need to pay off some debt? Or did they need to pay off some of their treasury debt that reached maturity? I'm only wondering because that is a ton of money.
Kevin Matte : yahoo finance link: Saudi Wealth Fund Slashes Reported Holdings of US Equities
Wisconsin2010 : Yes I’ve seen that that
Traderay : Learning