US Dollar Closes In On Four-Week High Fueled By Higher Yields In The U.S.
The US dollar rallied and traded within the range of its four-week high on Wednesday last week. The gains were attributed to the decision by the U.S. to go easier on Huawei, the Chinese electronics manufacturer amid the ongoing trade war with China.
Market experts also believe that higher yields influenced the impressive USD performance in the U.S. which have also been courtesy of the China-U.S. trade war.
"When yields are rising, it's natural for the dollar to be bought. I think moves in U.S. yields are really important," stated Sera, an analyst at Sumitomo Mitsui.
The dollar's impressive performance also benefited the US dollar index, which surged past the 98.20 levels on Thursday, thus hitting two-week new highs. The index demonstrated significant gains on Tuesday, Wednesday and the trend continued on Thursday. However, the index has since then plummeted.
The US dollar index rally was also fueled by FOMC minutes, which revealed the Federal Reserve's willingness to withhold any rate changes. However, numerous officials believe that prices and wages will soon rise and so they expect the Fed to react by raising rates. There is a chance that the Fed could implement tighter monetary measures if the market maintains its current trajectory and also if outcomes are as forecasted.
China-U.S. trade standoff a catalyst for the dollar as stocks take a hit
The US dollar has surprisingly been the major benefactors of the ongoing trade war with China. This is not so surprising considering that US President Donald Trump's administration has been implementing tariffs and trade restrictions to encourage better deals. This is especially true for better export prices, as well as favorable deals for imports coming from China.
Although the trade war created a conducive environment for the US dollar to rally, it has affected other sectors of the market such as the stock market which has turned bearish this week. The trade standoff has also introduced more volatility into the markets, and as a result, investors end up being more conservative with their investments. Many investors choose to liquidate their investments and lay low for a while to avoid the high risk. This is likely what is happening in the stock market, thus explaining why stocks have been on a free fall this week.
Chinese government starts implementing counter-measures
The trade war has also affected China's economy in a significant way, especially for the companies that export their products to the U.S. The Chinese Yuan also took a notable hit as evident by its performance over the past few months. However, the Chinese government recently announced that it would implement all the necessary measures to make sure that the value of the currency does not fall below 7 Yuan per US dollar.
China aims to maintain the Yuan at that range so that it can shield the currency from losing too much value. This will also help in making sure that investors remain interested in the Yuan because going beyond the 7-Yuan per dollar level would discourage foreign investors from investing in China.