Does the strong dollar make its comeback? - April 17, 2016

Does the strong dollar make its comeback?

Since last year, the dollar has weakened periodically against the major currencies. The reasons include the different central bank communications and currency traders have been continuously unwinding the US dollar long positions. Now it seems there is no need to bury the greenback yet.

The weakening of the US dollar made people to set out higher exchange rates regarding EURUSD, some even state that the era of the strengthening dollar is over. There are several reasons for this, among which are the Federal Reserve’s more careful communication regarding the expected interest rate hike, the ECB’s new slogan that they don’t anticipate to reduce rates further and finally, the commodities such as crude oil and precious metals price rising since the beginning of 2016. Anyway, if we look at the interest rate path we will see that fundamentals are still on the US dollar’s side despite to the changing communication, so it is worth to note that the market went way ahead of the weakening dollar.

Taking all this into consideration, no wonder future long contracts regarding US dollar have been cut back according the latest CFTC data. Future market positioning published 8th April show that expectations for stronger greenback are as low as registered in March 2014 (when EURUSD was at 1.37−1.40 that is 16−18% weaker than the current value of the dollar). This kind of turnaround can cause big surprises though, for those who have already given up on the strong dollar or simply shorting the US dollar. This doesn’t directly make the greenback strong, although it’s worth to keep an open mind.

Hence we think there is slight chance for an important dollar weakening and we rather expect currency stability and the mild strengthening of the dollar in the next months. In the context of EURUSD price, this means that they can reach their temporary record high between 1.15−1.17 and can move towards between 1.07−1.10 or even lower. See below the US Dollar Index chart showing that the past year’s sidling was simply a correction in the strengthening trend and in the future, it will aim to new records.

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However, we are still optimistic regarding the price of the gold and crude oil, we expect further price acceleration this year after smaller corrections.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. This is important when considering any investment.