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Last week the US dollar faced a downward spiral as bullish predictions from the International Monetary Fund fueled a demand for other currencies. The American greenback is the second most heavily traded currency in the Forex market, and it’s only natural for a demand to show up after the IMF’s recent announcement that the US dollar is too strong. The US dollar has been the strongest developed currency for a number of years, but the IMF believes it is time for a change.
The US Dollar’s three-day slide continued yesterday, despite the fact that global demand for US dollars was higher than expected. The greenback’s drop was most pronounced against the Pound Sterling, which is currently trading above $1.50 for the first time since the EU referendum. Analysts suggest that much of the demand for the Pound has been from UK residents who have been buying up their own currency to protect themselves from the potential economic fallout of leaving the EU. This influx of foreign capital is pushing up the price of the Pound, and causing the value of the US Dollar to decline.
It was a tough week for the U.S. dollar market, but more importantly for financial markets in general, amid a downturn that caused all major Wall Street indexes to drop significantly and made the dollar look directionless by the end of the week. The currency is fluctuating in both directions and traders don’t seem to know how to choose the best strategy and wait for the next market move. Throughout the week, the technology sector was the main driver of the sell-off, although all sectors rose in early trading today.
Uncertainty about the dollar as traders continue to wait
Such a large sell-off on Wall Street usually leads to a rise in the USD, as many of those who trade currencies tend to return to the currency as a widely used safe haven. However, this has not yet happened: Many people do not know how to respond to the confluence of circumstances caused by the fear of inflation.
Some analysts are openly questioning the Fed’s strategy of continuing quantitative easing, even as a recovery emerges in the US in particular. There is concern that too much money has been pumped into the economy and that inflation forecasts are much higher than necessary and expected. The U.S. Dollar Index rose slightly today, but remains below the key level of 91.
Pound and euro stay afloat
While the USD continues to struggle with the current economic situation, forex brokers see no such uncertainty in the EUR or the Pound, although the latter remains slightly under pressure at levels above 1.40. It is likely that the limited rise in US 10-year bond yields that we have seen up close today has kept both currencies in the spotlight, at least for now.
The euro also remains well supported despite current conditions, trading just below the 1.21 level. The fact that initial unemployment claims in the U.S. fell more sharply than expected likely helped support the level, with a new all-time low of 473,000 initial claims, down from 490,000 expected. Nevertheless, the persistent demands remain very high, which is a matter of concern for the experts.
Markets recover from a busy week
Wall Street had a difficult week as it failed to shake off inflation concerns despite the Fed’s best efforts. Significant losses were experienced during the week and the days of declines were among the largest of the year across all sectors. This is especially evident for the NASDAQ, which lost 4% this week.
Today, however, there are signs of recovery: At the time of writing, the Dow was up more than 400 points, while the other major indexes were up more than 1% for the day.
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