Dollar at the bottom: Tariffs ruin ‘exorbitant privilege’
This week turned out to be relatively quiet for the dollar. The dip at the end of last week was replaced by hovering near the bottom, i.e. around the 99 level on DXY, which corresponds to the lows of the last three years and slightly below the reversal area of the last two years. This situation suggests that we are only seeing a pause before further downside, not a reversal.
Since the beginning of April, an inverse correlation between the dollar dynamics and the value of promised tariffs has been evident. Rising trade barriers lead to a sharp sell-off in the US currency. Particularly disturbing is that both US stocks and bonds fall during these periods—a phenomenon common in emerging markets but rare in developed markets and almost never in America. This is an unambiguous signal from traders that trade wars are sharply curtailing the ‘exorbitant privilege’ the US has enjoyed for the past half-century.
Nevertheless, the Fed appeared to stand up for the dollar on Wednesday. Powell warned in his latest speech that the current situation justifies keeping rates high and even hinted at the possibility of a rate hike. These comments have helped the dollar index stabilise, but there are no clear signs of a rebound yet.
On the weekly charts, the RSI has reached oversold levels, which were last seen in August of last year and previously in early 2018. However, it took more than a month in the former case and about four months in the latter before a rebound occurred.
Author
Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.
