Does The Dollar Have Legs? – Saturday, Oct. 20

The US dollar appreciated against most of the major currencies last week while several of the typically volatile emerging market currencies, like the Turkish lira, South African rand, and Brazilian real appreciated. The US President’s criticism of the Federal Reserve, shared by many noted economists, including Nobel-prize winner Krugman (just doesn’t want Trump to say it), that it is moving rates too fast notwithstanding, the market is attributing a little more than an 80% chance, according to the CME’s model, of a hike in December. 

For several years, a concern among investors was that the Fed would not raise interest rates sufficiently in the expansion phase to allow it to provide the cuts it often needs to in the down cycle to stimulate the economy. This is why many expect the Fed’s balance sheet to grow again in the coming years. Now the concern is that the Fed may kill the recovery. A majority of Fed officials recognize the eventual need of bringing the fed funds target above its long-term estimate (3%), which is understood as the equilibrium rate (r*). In part owing to this ambivalence, the US dollar may find it difficult to build on its recent gains.  

Dollar Index

The upside momentum faltered as the 96.00 area was approached. Although there had been some minor penetration earlier in the month, the Dollar Index has not closed above it since August when the high for the year was recorded near 97.00. A pullback toward 95.30 in the coming days would not be surprising, however, a break of 94.80, the recent low would be disappointing. 

Euro  

The month’s low a little above $1.1430 was successfully tested ahead of the weekend. The RSI and Slow Stochastics argue against chasing the market. Look for better levels to sell as it already fell two cents from the week’s high. The upper end of the range is seen in the $1.1600-$1.1630 area that also houses the 100-day moving average and the recent highs. Initial resistance is seen near $1.1530-$1.1550.