This week, the US dollar index has been one of the worst-performing currencies in the G7 as shown on the chart below. The dollar index has declined from the high of $97.10 to a low of $96.32. This article will explain the top reasons why traders are selling the US dollar.
First, the main reason is that the Federal Reserve has signaled that it will cut interest rates. This change in policy started shortly after the December meeting, where the official sounded relatively hawkish. They expected to hike interest rates two times this year. However, while the US economy did well in the first quarter, there are signs that the economy is weakening. Investors expect the economy to have grown by just 1.8% in the second quarter, which is the weakest it has grown since 2017.
In the past few months, the numbers from the US have not been good. The new home sales numbers have been disappointing. In June, data from the Census Bureau showed that new home sales rose by 626k. This was the third straight month of declines, and the lowest level since March of this year. On trade, the US trade deficit has continued to widen as Donald Trump continues with his trade wars. In May, the trade deficit rose by more than $70 billion. This increased by more than $74.5 billion in June.
While Donald Trump has added more tariffs on Chinese goods, the reality is that most manufacturers are leaving China for other low-cost countries in Asia like Vietnam and Indonesia. As a result, US manufacturing has not improved. In fact, a number of large companies like Apple and General Motors have announced their plans to leave the country for other projects.
While the jobs numbers released this month were better than expected, the reality is that wages have remained being low. In addition, many companies have announced rounds of layoffs.
Meanwhile, other countries that form the dollar index are not doing well either. In the UK, the country is facing a number of challenges, including the uncertainty over Brexit. However, this week, the sterling was among the best-performing currencies in the basket that make the dollar index. In Japan, the yen has been strengthening as investors expect that the BOJ will move to tweak interest rates in the next one year. The Australian dollar rose sharply, driven by the recent trend in the labor market. In June, the economy created more than 21k jobs and the unemployment rate remained unchanged. In Canada, the loonie strengthened as investors expect the BOC to leave rates unchanged as the Fed raises rates.
As shown below, the dollar index has dropped sharply in the past few days. This price is below the 21-day and 42-day moving averages. The RSI has moved from the oversold level of 24 to above 42. The index has started to move higher in the past few sessions. There is a likelihood that the pair will continue moving to a high of 96.7.