Is the decline of the US dollar nearing an end?

There is no doubt that the past four months have been rough on the US dollar. After reaching its peak near 103 in early January, the dollar index (a measure of the greenback against a basket of currencies) has since been in freefall. It slid to levels around 92 on Aug 2, which marked the lowest reading since May last year.

On the other hand, safe-haven assets such as gold have rallied by US$100 (S$137) since. Another safe haven, the Japanese yen has, in turn, appreciated as well. With the dollar index hovering at key support for more than a week now, could this signal an end to its disastrous decline?

The bearish trend began as soon as markets came to the realisation that many of US President Donald Trump’s economic promises would not pan out.

Nonetheless, it was only when tensions between North Korea and the US escalated that investors started to withdraw in earnest from US markets. The S&P 500 and Dow Jones Industrial Average saw their biggest drop on Aug 10. As Mr Trump and North Korea’s President Kim Jong-un exchanged threats, there remains uncertainty as to whether this will eventually materialise into actual military conflict.

As such, while many analysts hold bearish views on the dollar, the support level seems to have held firm.

Despite the geopolitical uncertainties that have been pressuring the US markets, the Federal Reserve has not stepped in to offer its support. Economic data has not been strong enough to warrant regular rate hikes. While the central bank has repeated declarations of two to three interest rate hikes this year, the markets remain unconvinced. The corresponding lack of demand for the US dollar has reflected this sentiment.

On the political front, it appears that criticisms of President Trump are far from letting up. No matter how hawkish the Federal Reserve’s outlook is, risks and uncertainties continue to weigh on investors’ minds.

Market fundamentals aside, the technical perspective offers some glimmer of hope. With the dollar index hovering above a key support level, some rebound in prices is expected. Could this spell the end of the US dollar’s nightmarish decline? Unfortunately, with uncertainty still lurking around the corner, a fairytale ending for the US currency seems little more than a fantasy for now.

ABOUT THE AUTHOR: Zhou Shiwei is an investment analyst at Phillip Futures