Dollar Whipsaws and Wobbles

by:
Portfolio Strategist, MainStay Investments
  • The U.S. dollar whipsawed and wobbled this week, as the White House questioned trade policies.
  • Investor demand for safe-haven assets also helped bolster the dollar against most major currencies, but these gains were partially dampened by investor anxiety about geopolitics and caution ahead of the release of hard data and the Federal Reserve’s March meeting minutes.
  • The euro traded lower against the dollar, as investors consolidated gains after hitting key technical levels. Euro-sensitive investors will closely monitor the French elections and ‘Brexit’ negotiations for key insights into the direction of the currency.

The dollar whipsawed and wobbled this week within a tight range, but it did gain against most currencies. Most gains were sustained on Thursday, March 30 after the fourth-quarter Gross Domestic Product – or U.S. economic growth – was revised higher from 1.9% to 2.1%. The report was an important indicator, confirming that the economy is improving.

In Washington, however, the Trump administration sparked some investor anxiety when it decided to embark on its U.S. trade policy by signing two executive orders aimed at combating foreign trade abuses. These orders came at an interesting time, as President Trump is scheduled to meet with the Chinese President, Xi Jinping, this week. Trump has been an outspoken critic of Chinese currency manipulation. The dollar has held steady ahead of the meeting.

Also causing some investor caution were the Federal Reserve Open Market Committee’s (FOMC) meeting minutes. Investors typically use clues in the minutes to determine whether or not we will see a pickup in the pace of interest rate increases. If the minutes point to a more aggressive pace, the dollar could see more buying, but if the minutes show caution over the impact of a strong dollar or the elections in Europe, the dollar could sell off. In recent months, many indicators have pointed to improving economic growth in the U.S., but investors aren’t entirely convinced. Some are waiting for hard data (measures of actual performance, such as retail sales or GDP) to follow soft data (measures or surveys of sentiment, such as consumer confidence). The FOMC’s meeting minutes might also settle investor anxiety over the data gap.

The euro fell for a number of reasons. Euro trades seemed to consolidate after hitting key technical levels against the dollar. At the same time, the euro is under pressure due to European politics, including the nearing French elections and ongoing ‘Brexit’ negotiations. The euro fell to a two-week low against the dollar.

Currency Movements Are Hard to Predict

EUR
 
JPY
 
INT’L
 
4|4 -1.29% 0.37% 0.83%
3|28 0.03% 0.53% -0.10%
3|21 1.95% 2.71% -1.86%
3|15 1.83% 0.87% -1.30%
3|7 -0.09% 1.07% 0.68%
2|28 0.38% 0.82% -0.25%
2|21 -0.40% 0.50% 0.12%
2|14 -0.98% -1.63% 0.99%

Source: Bloomberg, 2/14/17–4/4/17. EUR/USD Spot Exchange Rate where the price of 1 euro is in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the euro. JPY/USD Spot Exchange Rate–price of 1 Japanese yen in U.S. dollars. The calculation is the one week percentage change in spot exchange rate where a negative value is the depreciation of the JPY. The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. A negative value indicates a general depreciation of the dollar.

 

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

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Robert Serenbetz

Portfolio Strategist, MainStay Investments

Robert Serenbetz is the Portfolio Strategist for Strategic Asset Allocation and Solutions Group (SAS). He contributes to investment thought leadership and communication efforts across New York Life Investment Management

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