Is this the turnaround for the dollar?

Something is wrong with the US dollar again. After a long rally, the currency is coming under increasing pressure amid the prospects of falling interest rates and a Chinese counter-attack in the trade conflict.

The US dollar started to gain momentum in the spring of 2018, after which more than 1% gains were made in more than a year, compared to the euro. This increase hides several things, such as that currency is a popular hiding place in turbulent economic times (due to Brexit and the trade conflict). The ascending US interest rates also played a major role in the advance. However, that now seems to be changing.

Powell under pressure
The American interest rate of 2,5% compares favorably with the 0% fee charged by the European Central Bank. However, there is a chance that this difference will become smaller. This is because Fed chairman Jerome Powell is under increasing pressure to cut interest rates. That is also why US President Donald Trump briefly hinted at the beginning of this year that he was going to push Powell aside.

Powell is also getting more and more economic arguments to cut US interest rates slightly. The growth figure for the first quarter was recently adjusted from 3,2% to 3,1%. In addition, several institutions (such as the International Monetary Fund) have lowered their growth forecasts for 2019.

Prepare for interest rate
During the press conference on Tuesday, June 4, Powell had an excellent opportunity to prepare the market for an interest rate move. However, the Fed boss let that opportunity pass. On the one hand, Powell emphasized that the Fed is ready to step in to keep the economy going. On the other hand, he also says that he only wants to give an impulse if it is really necessary.

That last comment is an indication that a rate cut is not going so fast. Traders, however, are already clearly choosing position. In the CME futures market, they are pricing in a 25% chance that the chief will cut interest rates at Wednesday's June 19 meeting. That chance is almost 75% in July and even more than 93% in September.

Dollar is vulnerable
A falling interest rate makes it less attractive to hold money in dollars. In addition, the US currency will also suffer more from the trade war. In response to the high tariffs on Chinese goods that Trump introduced in May, China is now threatening to cut its huge position in US Treasuries.

When the country converts the dollars it gets into other currencies, the US currency takes a serious hit. All in all, the dollar looks a lot more vulnerable than a few months ago. That's good news for those considering vacationing in the United States and for businesses importing items from dollar countries.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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