Dollar Strength

About: Invesco DB USD Bullish ETF (UUP)
by: WWS Swiss Financial Consulting SA

The Fed will probably raise interest rates by 25 bps.

The US dollar will be more attractive.

Forex traders can follow the trend.

The upcoming FOMC meeting will probably result in another 25 bps rise in Fed interest rates. This will make the US dollar more attractive for foreign investors and therefore help to reinforce the greenback in Forex markets.

The chart below shows the dollar index over a long period of time It is clear that the dollar has recently been trending higher.

The most recent developments have resulted in a downturn after the G-20 meeting as it appears that the trade war between China and the US is going to enjoy a ninety-day truce. Assuming that China does in fact purchase a larger amount of US goods, that should mean that the dollar is going to enjoy higher demand.

The Bloomberg YTD dollar index chart below shows that the dollar has followed a sideways movement with very gradual strengthening right into December. Despite the fallout from the vagueness of administration officials that led to the downturn on Tuesday, it is reasonable to assume that the upward trend is going to continue until early into 2019, especially if the Fed goes ahead with the December interest rate rise.

What is really important is the yield curve inversion for some Treasuries and the low yield for T10s. With another rate rise in December there may well be a yield curve inversion for the T2s/T10s. That would be a sign that a recession is on the way despite the claims of the administration that all is well with the economy. With a global slowdown already evident, a US recession should not overly influence the strength of the dollar in the short term.

Given the uncertainty over Brexit and the repercussions that a failed exit could have for sterling, one could bet that Parliament will not accept the deal PM May has hammered out with the EU and short sterling. That would be rather risky in any case. As for the euro, the riots in France and the sticky Italian situation could induce one to assume that the euro is going to weaken against the dollar. Again one could risk shorting the euro, which is a real gamble.

Following the trend in Forex often proves to be a good idea. As can be seen from the above charts, the US dollar has good chances of the trend continuing at least in the short term. As noted above Trump and President Xi have agreed to a ninety-day truce, which can be considered a breathing space for traders.

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