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FUNDAMENTAL ANALYSIS

Diverging Monetary Policy Supports Ongoing US Dollar Rally

fundamental-analysys-Diverging-Monetary-Policy-Supports-Ongoing-US-Dollar-Rally

If history is any guide the US dollar’s rally, which showed renewed vigour from this July, is very likely to continue for the rest of this year with increasing evidence that the US interest cycle is in the process of turning.

The US dollar is already at its highest levels since 2010 against a basket of major currencies. But such are the dynamics behind this rally that it could well go on into the first quarter of 2015.

But pull backs are very likely to occur - and some could be sharp given the recent pace of the rally. These pull-backs are likely to be driven by surprises from US data, comments from US policy makers and events in other countries.

Indeed, a yawning divergence is taking place among the major currency blocks with the chasm looking set to widen further. The statement from the meeting of G20 finance ministers and central bank governors on Sept 20-21 picked up on this point and it appears to accept these divergent trends among the major economies.

The ministers and bankers recognised the necessity for achieving robust economic growth to help normalise monetary policy. That has happened in the US and UK.

However, it was acknowledged that there is a need to address deflationary pressures. Both Japan and the Eurozone are in that camp. There are concerns about Japan’s ability to grow and increasingly there are fears that the Eurozone is turning Japanese and exhibiting deflationary symptoms.

That third point in the G20’s statement is a good description of the factors driving forex markets at the moment.

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