Will the US Dollar Continue to Gain Strength?

Will the US Dollar Continue to Gain Strength?

Since January, the USDJPY and USDCHF have been rising, but can the bulls continue the run?

Will the US Dollar Continue to Gain Strength?
Will the US Dollar Continue to Gain Strength? pixabay Images

Both the USDJPY and USDCHF currencies have been rising since January.  The USDJPY formed a low at 104.69 on January 3, 2019 and is currently trading at 110.59 (almost a 600 pip move in just five weeks).  The USDCHF made a low at .9720 on January 10, 2019 and is currently trading at 1.0071 (a 350 pip move in just four weeks).  These moves came after most forex analyst projected the US Dollar would weaken in 2019.  What changed?

Central banks and traders around the globe are looking for the "best among the worst" and, when comparing the US Dollar to other currencies, it is the best currency amid the growing economic slowdowns and political unrest.  For example in Europe, the bunds are offering lower yields and growth is weakening.  In the United Kingdom, the Brexit is causing the British Pound to move lower with some analysts predicting the currency to trade below 1.2000 in the near future.  (It's hard to believe that the British Pound was once trading above 2.00 in 2007.)  Additionally, the Reserve Bank of Australia announced last week that they may actually cut rates in the near future causing the Aussie Dollar to plunge).

Some economists believe that when the Federal Reserve Bank announced that it would not raise interest rates in the near future, it signaled to other Central Banks that to re-examine their monetary policies, as well.  Additionally, when comparing interest rates, the US Dollar currently has the highest rate at 2.5%.  The interest rates for the other major currencies are (those in parenthesis are negative interest rates):

  • Australia 1.5%
  • Canada 1.75%
  • Europe 0%
  • Japan (-.1%)
  • Switzerland (-1.75%)
  • United Kingdom .75%

Why do the bank rates matter?  Because for longer term currency traders, it determines the interest rates paid to hold a position overnight.  For example, the average interest paid if long on the USDCHF for this month is between 1.19 and 1.68% and for the USDJPY it is between 1.03 and 1.06%.  If a trader is short on the EURUSD then the interest rate is between 1.03 and 1.46%.  However, if the investor is long the USDCAD, then the average interest paid is between (-.10%) and .80.  While this is a very brief overview of how carry trades work, another way of understanding it is, if you are going to put money in your savings account, would you choose the bank with a negative interest rate (they charging interest to your account) or the bank with the higher interest rate (they are paying interest into your account)?

In other words, currently there is a monetary incentive to hold on to long positions on the USDCHF and USDJPY, while the monetary incentive for the EURUSD is to be short.

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