Dollar is Stretched at a 13 Year High

Dollar is Stretched at a 13 Year High
by, David Frank, Economist

The US Dollar has been on one extraordinary rise over the past two or so weeks. This past Friday, the ICE’s Dollar Index saw its tenth day in a row of gains. This is its longest bullish run since 2013 and has not been this high in thirteen years. The Dollar won gains against its most liquid counterparts as well as the highest yielding emerging market currencies. This renewed strength looks unstoppable for now. However, these gains will not continue unchallenged. The almighty buck’s strength is being fueled more on the razing of everything else around it and less on its own outlook or expectations. There is a growing sense of leeriness in the speculative market which could, in turn, mean a tipping point leading to a liquidity drain and skepticism.

Historically speaking, the Thanksgiving Holiday and week leading into the holiday break sees a drain of liquidity in the US financial markets. Statistically speaking, the S&P 500 usually sees its best month of performance through November. This is taking into account thirty years of data. Whether this is luck of the draw or holiday cheer, this is the relative norm that investors have come to rely on this time of the year. This presumption I dangerous, for investors in both the capital and Dollar Forex markets. Any good trader should come into this week, and the upcoming holiday season, with the approach that this time is different so as to complete a well-rounded analysis of any trades rather than hoping for the same old routine. This year, in particular, screams for more caution.

The US election for President, saw a candidate who was not favored to win, actually beat the odds to become the next president of the United States. Donald Trump is the president elect and he beat Democrat Hillary Rodham Clinton, a financial market favorite due to her status quo marquee. This sent ripple effects through the financial world, as equities have been on a torrid advance, US Treasury yields have been advancing and the United States Dollar has soared, tracking yields higher.

From a purely speculative position, the Dollar currently aligns itself to speculative risk appetite rather than panic that would see a flight of capital towards a safe haven asset. We have also seen US equity benchmarks move back to record highs along with the local currency show us that there is a relationship in play. There is a regional preference either based on returns or growth that investors are seeing. We are seeing a charge following the US election that is promising higher returns. President elect Donald Trump has called for an economic policy rich on fiscal spending and tax cuts. This has given renewed hope for a Dollar stuck on a faded charge from a monetary policy stuck in neutral from the US Federal Reserve. While this fiscal spending, stimulus along with tax cuts, could force the US Fed to steepen their rate hike schedule, nothing is etched in stone and the Fed is still playing a wait and see game. It is likely, they will raise rates in December which will further support the Dollar.

The other side of Trump’s economic policy is protectionism. While this could stoke Dollar strength at first, this type of economic policy will only drag on the economy in other areas, leading to a crimp in growth which could lead to the steam being let out of this current rally in the almighty Buck.

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