A Look Behind the Falling Dollar

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Stock market graph on a tablet computer showing the rise and fall of stock market values

Most traders have focused on the rally in technology over the last year, but another major trend has been weakness in the U.S. dollar. It’s worth revisiting that story today — especially because some important things have happened and more catalysts are looming.

Two news events moved the greenback last week. It initially rallied as newly installed Federal Reserve Chair Jerome Powell emphasized planned interest-rate increases. But then it reversed two days later after U.S. President Donald Trump slapped tariffs on foreign steel imports.

Today, it continued lower on reports that North Korea will stop developing nuclear weapons.

What’s going on? Here are some possible explanations. First, before getting elected, Trump complained that other countries were propping up the U.S. dollar to help their own exporters. After his election, authorities overseas let their currencies appreciate. A coincidence, or were they buckling under pressure?

The reaction to last week’s steel news suggests it was the latter. After all, fewer imports should lift the greenback. The fact the opposite happened could mean that the bigger trend remains intact, with the billionaire-turned-commander-in-chief simply jawboning the currency lower.

Secondly, the news from Korea was viewed as a sign that tensions are set to ease in a key economic zone. That could, in turn, could reduce the risk of Washington taking punitive steps against Pyongyang’s ally, Beijing: good news for the world’s biggest emerging market.

Trend followers may see reflections of this in the charts, especially after the U.S. dollar index (@DX) crumbled at its falling 50-day moving average last week. That resulted in a large bearish engulfing candle, with a higher high vaporizing into a lower low.

U.S. Dollar Index (@DX) chart

Other potential catalysts are coming soon. Wednesday brings ADP’s private-sector payrolls data and the Fed’s Beige Book survey of economic conditions. On Thursday, the European Central Bank announces monetary policy. The week concludes with the U.S. Labor Department’s non-farms payrolls report Friday morning — often viewed as the most important economic event each month.

How are markets reacting? So far, traders have reacted by returning to global ETFs and metals. We’ll have more on those in a future post.

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