US dollar - USD

The US dollar is the global reserve currency, and serves as a benchmark for pricing a range of assets such as commodities. Based on a recent survey by the Bank for International Settlements, more than 40% of all currency trading involves the US dollar, thus the performance of the currency is watched closely around the world. 


Daily update

The US dollar is mostly lower today. The dollar is currently the weakest against the British pound and the Australian dollar. Yesterday, the buck reversed course following weaker-than-expected Philadelphia Fed manufacturing survey data. Today's trading range for the US dollar index is 94.40 - 95.50. 

Looking at the dollar yesterday, second-tier economic figures such as the Philly Fed manufacturing survey seldom have a significant influence on the currency. Instead, traders were looking for a reason to sell the dollar after the buck moved into overbought territory, as indicated by the top end of yesterday's trading range (95.30). After falling for two trading sessions in a row, the dollar is no longer looking overbought. 

Turning to other developments, Federal Reserve member Kashkari (who is not a voter this year) stated that there are no signs of overheating in the economy. This is especially the case as the Fed has been surprised by relatively weak wage growth and inflation in recent quarters. Kashkari is a well-known dove, and tends to advocate for easier monetary policies. 

While the dollar has sold off in recent days, the currency has plenty of catalysts to keep strengthening. Yesterday's initial jobless claims figures showed that US unemployment is currently at historical lows. Upcoming sentiment figures later today should provide cues for the US economic outlook. The US continues to outperform all its major peers, which is helping the currency. Our outlook on the US dollar remains bullish. 

USD/JPY is up slightly and currently trading above 109.90. EUR/USD is up and trading above 1.1660. GBP/USD is up, and currently above 1.3290. 

Date Event Actual Previous
June 19 Housing Starts MAY 1.350m 1.286m
June 19 Building Permits MAY 1.301m 1.364m
June 20 Current Account Q1 -$124.1b -$116.2b
June 20 Existing Home Sales MAY 5.43m 5.45m
June 20 Fed Chair Powell Speech
June 21 House Price Index MoM APR 0.1% 0.2%
June 21 Initial Jobless Claims 16/JUN 218k 221k
June 22 Markit Services PMI Flash JUN 56.8
June 22 Markit Manufacturing PMI Flash JUN 56.4
June 22 Markit Composite PMI Flash JUN 56.6

US dollar Outlook




Policy: While the US Federal Reserve remains on a hiking path and recently passed tax cuts should improve inflation expectations, the US dollar remains weak. While most currencies are highly sensitive to changes in domestic policy, the US dollar is unique as it is a global reserve currency. By definition, a global reserve currency is a liability currency, meaning that is borrowed heavily in international lending markets. As most cross-border lending is conducted in USD, strong global growth leads to an acceleration of US dollar loans chasing international investment opportunities. This phenomenon has weakened the currency in recent history. The dollar is thus countercyclical by nature, as it weakens when ex-US growth is strong, and strengthens during global downturns. 

Sentiment: Looking at recent Commitments of Traders reports and technical indicators, speculator sentiment towards the US dollar remains firmly bearish. When positioning becomes too extreme, the dollar is more likely to experience relief rallies. As global economic conditions remain benign, as we have described above, it is still too early to suggest that we are on the cusp of a longer term US dollar bull market. While the dollar will continue to enjoy small rebounds when bearish sentiment becomes too extreme, the dollar's longer term trajectory remains bearish.      

Economic data: The US economy turned a corner in late 2016, and has since delivered accelerating rates of annual growth. From its lows in Q3 2016, year-on-year economic growth has accelerated in rate of change of terms. Looking at forward-looking indicators such as survey data, sentiment and industrial production all suggest a continuation of the current expansion. Despite rising crude oil prices, inflation and inflation expectations remain fairly subdued. Unless crude oil prices rise sharply in 2018, we expect inflation to resume weakening later this year. 


In our previous commentary on the US dollar, we warned that a weak dollar was hiding significant risks in growth-sensitive assets such as equities and European currencies. As the world’s reserve currency, the buck is inversely correlated to most financial assets because most cross-border lending is conducted in dollars. Thanks to a slowdown in economic growth outside the United States coupled wit…

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In our previous take on the US dollar in early February, we wrote that the currency was set to remain weak. At the time, ex-US growth was accelerating, while speculator sentiment was only mildly bearish. While dollar bulls have argued that rate hikes should help the currency, we wrote that expectations for monetary tightening were rising around the world, limiting the impact from the Fed’s action…

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The US dollar currency index, a measure of USD against six major peers, declined by 9.9% in 2017. Last month, the currency index continued declining and fell by another 3.3%. Given the speed of the recent decline, the US dollar started looking oversold according to technical indicators around mid-January. While we warned that the currency was looking oversold in several recent editions of our US …

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