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Weighing the Dollar

The US Dollar has been known for decades as the currency king and even at times a safe haven. The world trusts in the dollar since central banks and organisations are known to keep large reserves in, to mitigate risk as well as to safeguard the bank’s/organisation’s net worth. 

The issue traders generally tend to have when trading currencies, is predetermining how the currency pair’s price is likely to move. As traders, we have many tools we can use to establish this, such as technical and economic indicators. However, over the last 6 months, the globe has experienced abnormal trends, volatility and sentiments. These are due to a change in market conditions

The US Dollar has depreciated in value 13,480 points against the British Pound and the US Dollar index by 6.42. The depreciation of the Dollar is mainly due to 4 factors. The first being poor employment, the second the George Floyd protests, the third the delayed return to work for the public and lastly the possible trade wars. 

The decline of the US dollar mainly started towards the end of March when the number of COVID-19 cases started to draw the attention of many traders. Economies were shut down and the public was quarantined. When the second decline happened in May when April’s employment figures were released along with protest over the death of George Floyd

When April’s employment figures were released we witnessed the unemployment rate for the US go from 3.5% to 4.4%, and then to 14.7% in May. The Nonfarm payroll also dropped to -20,537,000 compared to 273,000 in March this year. Here traders can clearly see the reason for the decline as the dollar reached lows not seen for over 4 months. 

As previously mentioned the demonstrations in America are also largely connected to the fall of the currency king. Currencies, in general, are priced based on supply and demand factors, when a region experiences political and civil unrest it is likely that the currency will drop in value as we have already witnessed. Traders should monitor the developments of the protest and the government response. This can also be taken into consideration when analyzing the Dollar or US linked assets. 

Now turning to factors affecting the US Dollar this week, the instrument is supported by positive data from the national labour market. However, regardless of this, the Dollar is still declining. Instead of the expected reduction of 8,000 million jobs, Nonfarm Payrolls increased by 2,509 million, which is the most significant growth since 1939. 

At the same time, instead of increasing from 14.7% to 19.8% as predicted by the market, the unemployment rate decreased to 13.3%. The first comments of experts after the publication of the data are positive: they hope that the US economy has bottomed out and turned towards recovery.

On Wednesday, the Federal Reverse is planned to release their economic projections, economic statement and interest rate. Once these figures have been released, 30 minutes later the Central Bank will also arrange a press conference in order for members of the public to direct questions at the Chairman. These announcements and the Chairman’s comments are likely to be vital and create large movements in pricing the Dollar. 

The question traders ask themselves now is whether the US Dollar Index is likely to hover around the 96-97 mark or return to figures we have seen in recent months. 

In this article we have covered four major factors which are likely to affect the US dollar and US linked assets. The idea of this blog is to assist traders in their analysis and to ensure they are not overlooking the importance of these 4 elements. The more knowledge and information the trader has regarding an asset, the easier he will be able to predetermine its future movement.

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