Is USD the new Gold?

The price of the US Dollar is again on the rise! So much so that CITIgroup has advised that “the Dollar is the only place to hide”. So, why is the Dollar increasing in value?

Well there are a few reasons. The first and most obvious is the rise in interest rates. The Federal Reserve’s rate has increased from 0.25 to 2.5% in a short period of time. This means that investors are likely to earn more interest in Dollars. As a result, the demand for the currency is likely to be increasing. Secondly, the US Dollar is a “safe haven asset” meaning that investors turn to it while other investments underperform or appear at risk. Finally, the US economy has shown strong resilience and is not at geopolitical risk such as the UK and EU.

This morning, the US Dollar index increased by a further 0.16% and is close to its yearly price high. The price is currently at 109.90, which is 0.31 points lower than the yearly high. However, the rise in value of the US Dollar has resulted in the price drop of US stock indices and commodities. Gold declined by 2.22% and crude oil by 4.5%.

S&P500

The price of the S&P500 declined by 1.61% during yesterday’s trading session and opened on a negative price gap. The price gap indicates the magnitude of sellers in the market which currently have control. The price has continued to decline during this morning’s futures market. It is now below all moving averages and the volume weighted average price. Momentum indicators have also crossed downwards signaling downward trends, but, of course, traders should be careful about their entry and exit, as well as volatility.

S&P500 3-hour chart on September 16th.

The price of the index is being pressured by the monetary policy which is predicted to continue increasing over the next 3 months. As the economy has remained resilient, as seen with yesterday’s economic releases, most economists believe that a “hard landing” may be required to lower inflation. A hard landing basically means worsening economic conditions such as low demand and higher unemployment. The Fed has previously advised that this is something they are willing to consider as they believe that high inflation is a higher risk compared to a hard landing.

Another issue for the stock market is the rise in bond yields. Some may be wondering how these two asset categories are connected. Think of it this way; the two assets are competing with each other for investors. If bond yields increase, more people will be tempted to invest in bonds rather than stocks. Bonds are also considered to be much safer than stocks. Currently, the 10-year bonds reached a yield of 3.433%, which is already very close to the June record of 3.479%. Similarly, the 20-year bond has already surpassed this maximum, trading with the highest yield this year at 3.758%.

GBP/USD

The GBP/USD is declining significantly this morning compared to other US Dollar currency pairs. This is indicating a weakness in the Pound in addition to the strengthening US Dollar. The stochastic oscillator has crossed downwards indicating a potential downtrend. The exchange rate has now crossed onto a 32-year low.

GBP/USD 30-minute chart on September 16th.

The US Dollar has, of course, been supported by the higher-than-expected inflation figures from earlier this week. But in addition to this, the US Dollar found support in positive economic releases from yesterday afternoon. The Retail Sales figure came in at 0.3% for August, up from –0.4% in July. Additionally, the Import Price Index (MPI) decreased by 1.0%, and by 1.6% for export, which is better than the reduction of 3.7% from a month earlier.

Today the market will turn their attention to the Preliminary Consumer Confidence Index which also has the ability to influence the price of the US Dollar.

Quick Summary:

• CITIgroup backs the US Dollar for longer term investments.
• US stocks continue to be pressured by the monetary policy and rising bond yields.
• GBP/USD continues to decline with the Pound weakening.
• US Retail Sales figures came in better-than-expected.
• Traders turn their attention to the Prelim Consumer Confidence Index.