US Dollar breaking out to new highs

By ,   September 30, 2014

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The US Dollar, (as measured by the .DXY index – an index including a basket of exchange rates for the USD against other major currencies), has surged in the last few weeks as a perfect storm of influences push prices to four year highs.  We feel the main change in sentiment behind the rally has to do with lagging Euro zone inflation.  This situation is putting pressure on the ECB to do more to stimulate the economy to avoid deflation.  Similarly, another component of the index is the exchange rate between the US Dollar and the Japanese Yen.  The Japanese economy is stalling after the planned sales tax hike earlier this year, and many investors think this could cause the Bank of Japan to add more stimulus to their economy in an effort to achieve their 2% inflation goal.  With the ECB and the BOJ both looking at stimulus measures, the Euro and Yen are likely to continue to weaken vs. the US Dollar.

Compounding the issue, the Federal Reserve here in the US continues to hold course in removing stimulus as solid economic numbers reflect the growing strength in the US economy.  The Fed’s asset purchase program is due to end next month which will remove supply of US Dollars in the global market.  This should support demand and prices for the currency.  

Moreover, the boom from the US shale revolution has allowed the US to reduce imports of foreign oil over the past several years.  Again, with imports declining, fewer US Dollars are being circulated in the global market which should limit supply.  

We are expecting these influences to continue in 2015, so we feel it is important to be selective when investing in commodities and emerging markets – two asset classes particularly sensitive to movements in the USD.

DXY chart - Sept 2014

References: 

Thomson Reuters Eikon

Kimberley, Neal  FX Column “U.S. shale bonanza and Fed taper to light up  dollar .DXY”  Reuters September 30, 2014