Well, the answer to the second question is yes. Yes, but … The answer is only yes because prices tend to go in trends and your best SHORT-TERM guess as to the direction of the dollar is that it will continue to move higher.
But beware! Once we look at what is driving the dollar higher, we may feel that the rally is on shakier ground than most investors seem to think. Let’s look at three important reasons behind recent dollar strength.
The first factor driving the dollar higher is tighter monetary policy. The Federal Reserve has been contracting the money supply since the beginning of 2015 and started to raise interest rates in December.
This tightening has probably helped the dollar strengthen. But the recent history of central banks tightening has been that they have been too early, too aggressive.
If we look at the Federal Reserve’s own projections of where rates will be in a year’s time, they have consistently overestimated the pace of rate rises.
So, it is likely that rates will not go up as quickly as the Federal Reserve, or investors, expect.
The second factor is real bond yields. This is due to the new Trump administration’s stated policies.
Tax cuts and infrastructure spending will raise the budget deficit, increase the supply of bonds to pay for it, and raise longterm interest rates. Real rates for U.S. 10-year Treasuries rose from 0.15% (for the 10-year inflation-protected security) to 0.74%.
But how likely is it that the budget will go through as envisaged?
