Dollar in stormy weather: fire and fury

The sharp drop in the dollar is the biggest surprise of 2017 in the currency world. Despite Trump's great promise for 'fire and fury', the American currency has bounced back a bit in the past week.

North Korea must reckon with "fire and fury like the world has never seen" if it provokes the United States or its neighbors again. The North Korean response was not long in coming. The country threatened to bomb the island of Guam with rockets.

The US currency briefly fell 7% against other major currencies on Monday, August 0,5, before recovering rapidly. After a remarkably weak first half of the year, the dollar has been on the rise again last week.

Focus on US interest
The recent recovery of the dollar is partly due to the strong development of the US labor market. In July, 209.000 jobs were added, while economists had expected a rise of only 189.000. The increase was entirely due to the creation of 393.000 part-time jobs. The number of full-time vacancies actually fell by 54.000.

On balance, the Federal Reserve still seems reluctant to raise interest rates again. Traders are pricing the chance of a rate hike before the end of the year at less than 50%. At the beginning of the summer, the market was still anticipating 2 rate hikes in 2017.

The European mirror image
In a sense, the European economy is the mirror image of the American one. Inflation in the eurozone returned to 1,3% in July and the deflation threat, which many economists worried about a year ago, has completely faded into the background. A strong European economy paves the way for the ECB to raise interest rates again in due course.

dollar storm
The conflicting reports about the US and European economies have completely turned the sentiment in the foreign exchange market. Another factor is that the unpredictable policy of US President Donald Trump has repercussions on the value of the US currency. In addition, it has been quite quiet on the financial markets lately. Investors dare to take more risks, while the dollar is considered a safe haven in periods of mounting tension. The coincidence of all these developments creates the current dollar storm.

Central bankers on the move
For the foreseeable future, the fate of the dollar will largely be in the hands of central bankers on both sides of the Atlantic. Any indication that the ECB will reduce stimulus measures, or that the Fed will leave rates unchanged for the time being, will only increase the pressure on the dollar.

On the other hand, a better-than-expected economic data in the United States could lead to a reversal of sentiment and the currency to recoup some of its recent loss. The currency world is quite nervous and many parties therefore choose to hedge risks instead of consciously choosing a position for a certain price direction.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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