Strong Dollar to Dominate Forex Markets

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The rising strength of the US dollar will continue to dominate the forex markets in the months ahead in the context of diverging monetary policies of the US versus the rest of the world and the weak economic conditions persisting across the world, said Jameel Ahmad, Chief Market Analyst at ForexTime. forex market

“The US dollar is reigning in the forex market as indicated by the recent International Monetary Fund [IMF] report. After the close of the first three months of 2015, the euro’s market share has run into its steepest quarterly drop against the US dollar since the launch of the single currency in 1999. Clearly central bank policies are dominating the market volatility,” said Jamil.

Traders are rushing towards dollar because of the improving economic indicators in the US economy and the perception that the Federal Reserve is going to hike interest rates in the second half of 2015.

The contrasting divergence in both economic sentiment and monetary policy between the US and everywhere else was already becoming obvious to traders and leading to increased dollar demand. As a result of this and with other major central banks easing monetary policy, the dollar is driving to multi-year highs against some of its major trading partners.

Short term corrections

The Labor Department last week reported that 126,000 jobs were created in March, well below economists’ expectations and the fewest added in more than a year. Also highlighting weakness in the jobs market, data from the Institute for Supply Management on Monday showed the pace of growth in the US services sector fell to a three-month low in March.

The data points to a loss of momentum in US growth and suggested the Fed, which some have thought could raise rates as soon as June, may push back its first rate hike until later in the year. This view was supported by the president of the New York Fed, William Dudley, who said on Monday the US central bank would need to determine whether the jobs report foreshadowed a more substantial slowing in the labour market. He said he expects the path of rate hikes to be “relatively shallow.”

Expectations the Fed will raise rates this year have fuelled the dollar’s rally since mid-2014, though recent weak data has eased concerns it would strengthen further. The strong dollar has been a big concern on Wall Street, with worries that the earnings of multinational corporations will take a big hit when overseas profits are translated into dollars.

“The traders are expecting a rate hike this year. Any hint from the Fed of a decision otherwise could result in a correction in the currency markets,” said Jamil.

UAE gains

With the dirham pegged to the dollar, Jamil said for consumers in the UAE, now may be the best time to buy imported goods from Europe and Japan. With the US dollar being on the rise since the second half of last year, the dirham is benefiting greatly from its link to the greenback. “In the current economic climate, with the US dollar dominating the currency markets, the peg of the Dirham to the USD spells good news for consumers in the UAE,” he said.

Expats from Europe, the UK, India, and other countries with weakening economies against the US dollar are benefiting from the dirham’s peg to the greenback. The strong dirham exchange rate against most other currencies means that foreign workers in the UAE can now send more money back home.

Gary Beal