The US dollar rose to the highest level since May 2017. As of this writing, the US dollar index was trading at almost 98. In recent weeks, the index has been making higher highs, despite the fact that the Federal Reserve has taken a more dovish stance. Here are the reasons why the index has been rising.
First, the European economy has been weakening. Yesterday, data from Germany showed that the business confidence was declining. According to ifo, the business climate index declined to 99.2, from the previous 99.6. Investors were expecting it to rise to 99.9. The current assessment declined to 103.3, which was lower than the previous 103.9 while the business expectations declined to 96.2. Italy is in recession, and the issue of Brexit remains being a thorn in the flesh for the region. This has clouded the investment space, with most companies cutting their level of investments.
Second, in Australia, the rate of inflation declined in the first quarter. This raised the expectation that the Reserve Bank of Australia (RBA) will slash rates this year. This is after the AUD jumped last week with the improved Chinese growth. The same trend has been followed by the New Zealand dollar.
Third, in the United Kingdom, the sterling has continued to decline. This is because the country Brexit strategy appears to be in limbo. Late last month, the European Union accepted to extend the exit deadline. While this was a good thing, it also extended the uncertainty for the UK. This is because businesses are unable to make any decisions since they don’t know whether there will be a deal or not.
Fourth, in Sweden, the krona has continued to weaken as the Riksbank has put a pause on further interest rates. In Japan, the central bank finally gave an indication on when it will hike rates. This is a positive sign that could see the yen gain.
In the United States, while the Federal Reserve has announced dovish statements, investors believe that the economy is doing pretty well. This earnings season has confirmed this. The housing market and the employment sector remains a bit stable. However, with country’s political temperature warming, this could change.
On the one-year chart below, the US dollar index has continued to rise and is above the 50-day and 100-day moving averages level. The price is also above the important diagonal support shown below while the RSI has moved closer to the overbought level of 70. There is a likelihood that the index is likely to continue moving up to test the 98 resistance level.