Is it Time to Take Dollar Profits?

Is it Time to Take Dollar Profits?

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USD dollar index

The United States dollar is currently trading at an all-time high against some of the global currencies. This week, the United States Dollar Index went to an all-time high settling at 101. Against the Euro, the dollar traded at an 8-year low of 1.0556. As such, traders who have placed a bet against the dollar have made significant losses while those who have held the dollar have made sweet returns.

The continued rise and rise of the dollar has been caused by the imminent perception that the Federal Reserve will hike interest rates come December 16th. All the fed officials who have talked have stated that the economy is currently performing well which could necessitate a hike. A hike in the fed interest rate will mean that the economy is doing well. This will lead to an increased demand for the currency as global investors transfer their money to the safe haven.

A year for the dollar

2015 will go down history line as one of the best years for the dollar. This year, the currency has gained against all the major currencies except for the Japanese Yen. In the developing and emerging markets, the dollar has continued to strengthen leading to significant economic pressures. Brazil is one of the most affected countries.

A few factors have contributed to the continued rise of the dollar against major currencies. One, the United States has continued to show that it’s recovering with key numbers such as GDP, Inflation, and employment numbers doing well against the set projections. Secondly, the global economic environment has faced a number of problems such as the Greece crisis. During the period when the Greece crisis was at the highest, the USD index climbed to above 100 for the first time. Continued problems in the Euro led to the dollar rise.

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Monthly chart for EURUSD

In Japan, the economy continued to perform below despite the mitigations put in place by Abe. They are commonly known as the Abenomics. This has led to the Japanese economy to enter a recession, the third time in 3 years. This too has led the dollar index higher.

Third, the global economy is expected to grow at a decreasing rate. Earlier this year, the International Monetary Fund (IMF) reduced the projections of growth this year. This was as a result of the prevailing slow growth in China and the rout in global commodities. As a result, the dollar index continued to perform well with the positive economic data coming from America.

Fourthly, the rout in global commodities led to the strengthening of the dollar. 2015 will go down as one of the worst years in commodities. The Bloomberg Commodities Index (BCI) which measures the weighted averages in more than 20 commodities was at its lowest this year. The Rogers Commodities Index too was trading at the lowest level since its creation.

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Hourly chart for AUDUSD

This rout was caused by the increased supply in major commodities such as oil. Today, crude oil is trading between $41 and $42 a barrel. This is the lowest level since the financial crisis. It was caused by the increased supply in the commodity. On the other hand, Gold has continued to perform poorly. This is always expected when the dollar is strengthening because of the negative correlation that exists between the two. The idea is that gold is viewed as a safe haven or a hedge against the dollar. Therefore, when the dollar strengthens, investors dump gold for the dollar. Virtually all commodities have had a rough year in 2015. As a net exporter, United States has benefited from the selloff in commodities which has led to an increase in the dollar against Canadian, Australian, and New Zealand dollar.

Time to sell?

For day traders, the Federal Reserve decision will be very challenging to trade. As stated in the introductory statement, the fed is expected to increase the interest rates in December. Therefore, after the news, many uninformed traders will go to buy the EURUSD pair expecting it to rise. The truth is that if the interest rates are hiked, the pair will go down as investors take profits because they have already factored it in their current trading.