By Jameel Ahmad, VP Market Research at FXTM
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Despite a variety of upbeat comments from different Federal Reserve officials in recent days, the Dollar Index appears to be at risk of dropping below the psychological 100 level.
Why could this be? Perhaps investors are concerned that the Trump administration will turn its attention back to barking at the strength of their currency. Either way, the weakness in the Dollar is providing a platform for strength across the majority of its major trading partners with the Euro, Japanese Yen, British Pound and Swiss Franc among others strengthening against the Greenback during trading on Thursday.
Looking at how the emerging market currencies in Asia are performing, it is hard to believe that the reason for the weakness in the Dollar is because investors are not as excited as they used to be around the prospect of higher interest rates in the United States. The Malaysian Ringgit, Indonesian Rupiah, Indian Rupee, New Taiwan Dollar and Philippine Peso all weakened against the USD on Thursday. It is mainly the emerging markets in Asia that are seen as being the most vulnerable to increased interest rates in the United States.
Are US equities overstretched?
While the USD is appearing fragile, the US markets are printing new highs and investors will be wondering whether this run continues when the American trading sessions get underway shortly. Investors have obviously bought into the news that President Trump is set to announce his tax plans in the next couple of weeks, although I believe that actions speak louder than words and investors still need full clarity on the fiscal campaign promises before pricing in further premiums into the equity markets.
Gold nears $1240
It’s interesting that investors continue to be enticed by Gold, regardless of US stock markets maintaining their positions around record levels. Of course Dollar weakness helps Gold, but I just wonder if investors are hedging towards the precious metal as a result of questions remaining in the background as to whether this stock market rally can really continue.
Turkish Lira resumes weakness
After the USDTRY fell to its lowest level since early January during trading this week, the Turkish Lira appears to have reversed its momentum, with the Lira falling against the Dollar on Thursday. While there is an obvious argument that after such aggressive punishment in recent years that the Lira is oversold, it is too difficult to ignore all the different problems that the Turkish economy is facing. Whether it is social, economic or political, Turkey continues to face an undeniable number of problems that will make investors nervous about touching the Lira.
While we have seen the carry-trade idea help the previously oversold Brazilian Real and Russian Ruble, I doubt that the Turkish Lira can at present benefit from a carry trade. Although the interest rate policy in Turkey is high in comparison to other emerging market economies and this is what is thought to have attracted investors towards the Brazilian Real and Russian Rouble, the combination of different issues plaguing Turkey is going to prevent the Lira from rebounding much further in my current view.
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