Has the Dollar Turned Around?

Over the last months, the dollar had been steadily weakening.

But recently, and in particular, after the Fed’s policy meeting on Wednesday, the greenback has been trending higher.

There are quite a few reasons for this. And these are helpful to understand in order to figure out if this is just a correction or a new trend.

One of the things we need to keep in mind is that the dollar index bottomed out back on Jan 6, the fateful day of the Capitol riots.

Naturally, that was a risk event. And the trend of the dollar might have plenty to do with a general loss of enthusiasm in the market.

What Happened at the FOMC

As expected, there were no major surprises out of the monetary policy meeting.

The market paid more attention to Chairman Powell’s press conference afterward. Most of his speech just repeated what was already known.

However, there were two important elements to it. First, was that he firmly squashed rumors about a potential taper. But those rumors really weren’t grounded enough to really shift the market.

Secondly, Powell conveyed more confidence in the economic outlook.

As expected, this had much more of an impact on the markets. This is because it implied that even though the Fed nominally stands ready to inject more stimulus, they really don’t think it will be necessary.

With the latest $900B in stimulus plus another $1.9T (subject to political negotiation), the onus on pushing the economy forward is on the Federal government.

There Are Also Some Coincidences

Around the same time, the market was already getting jittery over reports about the potential effects of the #wallstreetbets saga.

At the time, at least two hedge funds were on the hook for potentially over $10B each. And this might have knock-on effects if those funds weren’t able to meet their obligations after being forced massive payouts to cover their shorts.

The scenario is unprecedented. And it caused a move towards safe-havens.

All through the trading afternoon, other concerning things happened. For example, the SEC announced they were looking into the situation.

Generally, that would help calm the markets. But, in this case, it signaled that the issue was rather important.

Then Ameritrade and Robinhood suspended trading in the accounts, while Dicord shut down the group’s server. The market really doesn’t like sudden changes, and that likely helped spur interest in the dollar.

At the moment, it’s not known what the fallout will be. In fact, there is reason to be worried that new trading rules will be implemented to head off future situations like this.

Since we don’t know what those will be, traders are likely to be sticking to safe havens like the dollar, until we get some more clarity.

Trouble with the Vaccine Roll-Out

Another factor that has sapped risk sentiment is the new administration’s growing pains in communicating their plan for vaccines.

While Europe is fighting over vaccine distribution issues with AstraZeneca, various Biden administration officials have come out with contradictory statements about how many vaccines we can expect.

Even the President himself had to correct his own statement. He first said that mass vaccination would start in late spring, but he then moved it into the summer.

In fact, far from accelerating, the pace of vaccinations in the US has actually slowed slightly since Jan 15.

In summary, there are several reasons for traders to be somewhat nervous. And we could expect the dollar to be supported until those issues are resolved.

Trading the news requires access to extensive market research - and that's what we do best. Open your Orbex account now.