U.S. Dollar Gains Strength Off Remarks of the Federal Reserve Bank

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Brett Chatz writes: US dollar gains ground against all of its major trading partners. The US dollar held firm and gained ground against most of its major trading partners in the currency markets. This about-turn in expectation materialized after a poor forecast for US durable goods failed to dampen the dollar’s appreciation against major world currencies. Economists pointed out that the dollar had gained ground against most of the 16 traded currencies. Further news for investors is that the Fed looks set to cut bond purchases in upcoming months. The dollar gains were however halted after John Kerry (US Secretary of State) declared that President Barack Obama will hold the government of Syria responsible for its actions. This is seen as a potentially dramatic shift in foreign policy after the administration seemingly backpedalled on its red line comments.

South of the United States, the Mexican peso reacted negatively to sentiment that policy changes within the Federal Reserve will lead to a rapid withdrawal of funding from emerging economies. Tapering during the month of September is seen to be a major factor in the currency markets and the relative strength of the dollar against its major trading partners. According to one such financial trading index – the Bloomberg US dollar index – the USD gained ground (0.1% at 17:00 in New York). The strength of the dollar marks a reversal in recent times against the euro and other currencies. In other foreign currency news, the Turkish lira depreciated to its lowest level yet. The Turkish central bank also allocated funding to Turkish banks at the benchmark rates – the first time in 6 days that this has been done.

Potential US Military Intervention in Syria

Whenever the threat of military action is brought to the economic arena, uncertainty tends to creep into the mix. When Secretary of State John Kerry announced that the US president intends to hold the government of Syria accountable for the use of chemical weapons against its own civilians, the dollar slid against the Japanese yen. However, the decision to use military force is still being weighed against other potential options. The general consensus is that all options remain on the table and that the Obama administration is paving the way for potential change. Currency strategists agree that the use of force generally pushes investors towards safe havens and away from currencies.

The central bank governor of Mexico recently requested clarification from the Fed regarding the purchase of bonds. The fear in emerging market economies is that the US government will withdraw resources from these countries, leading to a loss of foreign currency reserves and much-needed capital. The Mexican peso was last trading at 13.189 against the US dollar. This marked a1.8 percentage point decline. In a similar fashion, the Indian rupee drop 1.5% to just over 64.3 per US dollar.

The Middle East remains a hotbed of economic and political uncertainty as the Turkish lira continues to slide. By the close of trade on 26 August 2013, the Turkish lira was last trading at 1.9995 to the US dollar. This marked a 0.5% decline in the city of Istanbul. Currency trading strategists at leading banks across Istanbul feel that the general sentiment regarding the Turkish here is negative and that the currency will remain weak against its major partners.

Over-the-counter forex trading options amounted to $16 billion, $1 billion less than the $17 billion traded on August 23, 2013. This information was supplied by the Depository Trust Clearing Corporation. The heaviest trading took place between the US dollar and the Japanese yen – a figure of $4.6 billion. This was up 12 percentage points versus the previous 5 Mondays. Euro-dollar trading was down 8%. This amounted to 29% of overall trading for the day. Comparatively, the Euro-dollar trades amounted to 11% of the total at $1.7 billion. Options trading in the Australian dollar/Canadian dollar amounted to $452 million with the Australian dollar (the Aussie) gaining a healthy 0.5 percentage points.

The overall performance of the US dollar during the year has been positive. Overall gains are fast approaching 5% for 2013, according to indexes that track 10 of the world's developed country market currencies. The yen has performed poorly by shedding 9%, while the euro has been the star performer with a 6.4% increase during 2013 to date.

The Wall Street Journal Dollar Index
Sentiments differ between the Bloomberg index and the Wall Street Journal dollar index. The WSJ Dollar Index measures the strength of the greenback against 7 of the world's most traded currencies. According to this particular technical performance tool, the dollar is down by four percentage points during August alone. The US dollar gained ground during July 2013 as it powered its way to an 8.3 percentage point gain for the year. However, the about turn in expectations about the US dollar is grounded in the belief that the Federal Reserve will likely pull back on expenditure in the economy. The purchase of bonds is set to slow, which will raise the value of the dollar. Less than optimal jobs and retail sales growth figures suggest to investors that bullish sentiment about the dollar's strength is perhaps a little misplaced at this juncture. Hence the lukewarm reaction to futures options favouring the dollar. Overall, the general feeling is that there is uncertainty in the strength of the dollar going forward. This is driven mostly by less than optimal jobs figures and weaker than expected retail sales. The hope is that the Federal Reserve will only start pulling back on bond purchases when a full recovery is evident. Even though large numbers of jobs are being added every month, these are lower than what is required in any economy the size of the USA.

Author’s Bio: Brett Chatz was born in Johannesburg, Gauteng, South Africa. He attended the internationally accredited University of South Africa, where he completed the prestigious Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes his expertise and knowledgefor the top UK spread betting and CFD trading provider, InterTrader.

© 2013 Copyright Brett Chatz - All Rights Reserved

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