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Why is the U.S. Dollar on a Tear?

Last updated 3/27/2009 9:28 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

With the rally in the stock market and recent economic data invigorating hope for a U.S. recovery, traders needed a good reason to continue selling dollars.  The big story this past week was the possibility of the dollar being replaced by the a global reserve currency but reports that this topic will not be discussed at the upcoming G20 summit has provided some relief.  A confluence of factors have driven the U.S. dollar higher today.  U.S. economic data was mixed which means that it did not contribute the rally.  According to the latest reports, personal spending has slowed, personal income dropped to the lowest level in nearly a year while inflation ticked modestly higher. 

There are 5 different reasons why the dollar has staged a sharp rally this morning. 

1) Comments from German Finance Minister

Most importantly, the rally in the U.S. dollar began when the German Finance minister issued a critical warning about the negative consequences that fiscal irresponsibility in Europe could have on the Euro.  Although the market chose to react to his comment, it was nothing groundbreaking.  All countries with a growing budget deficit will struggle to make ends meet and there is no question that the lagging monetary policies of the Eurozone will put a greater strain on the region.

2) ECB Expected to Cut Interest Rate

Secondly, at a time when many countries have reported stronger inflation pressures, incoming data from Germany suggests that inflation in the Eurozone's largest country is still slowing.  Weaker economic data and softer inflation pressures could push the European Central Bank to cut interest rates to 1.00 percent next week.

3) Global Reserve Currency Not a Topic at G20

Investors are also relieved that a global reserve currency to replace the dollar would not be discussed at the upcoming G20 summit according to senior Japanese and Russian officials.   

4) Japanese Repatriation

The Japanese are buying Yen and selling all of the other major currencies ahead of their March 31st fiscal year end and finally,

5) U.S. Equity Futures Down

U.S. equity futures are down suggesting that the improvement in risk appetite witnessed yesterday is fading. 

Next week, everyone will be speculating about the chance of the European Central Bank adopting Quantitative Easing which should drive the EUR/USD lower. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.