On Monday, February 11 the dollar index rose to its highest level of 2019 as it closed at 96.857. The dollar has been appreciating against other world currencies since January 31 when it turned higher from 94.874. The euro currency accounts for 57 percent of the dollar index and the interest rate differential between the dollar and the euro at 2.65 to 2.90 percent is highly supportive of the gains in the greenback. While the US Federal Reserve still plans to hike the short-term Fed Funds rate twice in 2019, the European Central Bank is likely to leave their rate at the negative forty basis point level based on their most recent guidance. Economic weakness in Germany and the Eurozone continues to prevent the ECB from increasing the rate from negative territory where holding euros involves a cost.
The daily chart of the dollar index highlights that the greenback has posted gains over the past eight consecutive trading sessions. Technical resistance for the index stands at the 2018 peak at 97.705. The dollar is heading for the highs, and that could have a significant impact on markets across all asset classes. Meanwhile, a strong dollar is typically bad news for commodities prices given the historical inverse price relationship between the US currency and raw material prices.
Interest rate differentials tend to be a primary factor when it comes to the path of least resistance for currencies, and the dollar offers an attractive yield compared to its peers these days. At the same time, a stronger dollar is not good news for earnings of US multinational companies as a rising dollar makes US products less competitive on global markets.
In the world of commodities, the rally in the greenback has sent the price of gold and silver lower over recent sessions, and it has weighed on the price of crude oil which ran into technical resistance at just under the $56 per barrel level on the nearby WTI contract.
While it looks like the dollar is going to challenge and surpass its technical resistance level which is now only 0.848 away on the upside, some issues could turn the dollar lower over the coming days.
The three-week reprieve on the US government shutdown runs out later this week on Friday. The issues that caused the initial partial closure of the US government have not gone away. The Trump administration continues to advocate for a security wall along the southern border of the US with Mexico, and the leadership of the House of Representatives have not yet displayed a willingness to compromise. Another shutdown could turn the dollar lower. At the same time, the trade negotiations between the US and China in Beijing this week could impact the value of the dollar if there are any surprises.
Markets rarely move in one direction, but the rally in the dollar has gone nowhere but higher in February. Markets always look their best when they are rallying and worst when they are falling. The dollar looks great these days, and there are plenty of reasons why it should keep going. However, there are roadblocks on the horizon that caution that getting too bullish after eight straight sessions of higher prices could be a mistake.