Five Reasons Why the Dollar Could Keep Falling…

The decline of the dollar has taken center stage. Everyone seems to know why the greenback is faltering. But the question of when or if the dollar will reverse its downtrend remains unanswered.

As my colleague Ashish said last week, only Wall Street and a pullback in the stock market will save the dollar from its freefall at this point. After all, when the market panics, everyone flocks into the dollar. But this insane rally is likely to continue until we see some meaningful correction in stocks. Investors are definitely more afraid of missing the rally than getting caught in another bubble.

Unless Wall Street steps in, there are other five good reasons why the dollar could continue to fall…

#1) The Fed is not taking any significant measure to save the dollar because a weak dollar will boost profits of major U.S. corporations and keep the stock market rally going.

#2) Central banks around the globe are dumping the dollar and diversifying into other currencies. After all, they know the dollar will continue to lose its value in the long-term.

#3) With other nations increasing rates, the dollar will continue to be used as a funding currency for carry trades. The latest minutes from the Federal Open Market Committee stated that “policymakers felt inflation would remain subdued for some time amid substantial resource slack.” That means rates will stay low for a long time, maybe for the whole next year.

#4) BNP reports that short positions in dollar have been increasing, but haven’t reached the extreme levels of 2007. So there’s more room for further depreciation. And the decline in DXY has only been retracing the gains from last year’s financial crisis.

#5) With money market funds’ holdings at still historical high levels and investors confidence increasing, institutional investors may be tempting to move cash into stocks during any pullback. They have an incentive to do so because they get paid more if they perform better than benchmarks. That’s what is called the “window dressing” effect.

Again, the rally of the dollar will happen with no doubt. The question is when. Be prepared. Keep an eye on stocks for any short-term pullbacks that could break the dollar’s downtrend.

Also, my colleagues and I are watching this puzzling dollar story play out. We’ll be back here in FX University the second we see any hints of a turnaround.

Best Regards,
Evaldo Albuquerque

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