The USD Index Rise Continues Trend

The US dollar index has been on
an upward trend since January this year. The pair had a major reversal after
the Federal Reserve released its interest rates decision. In the statement, the
bank reversed its earlier hawkish views and said that it would be patient on
future interest rates hikes. This was a bad sign for the US dollar, which
reacted by having a major decline. However, after that, the dollar index has
continued to rally and has reached the highest level since December last year.

The reason for that is that other
countries that make up the dollar index are not doing well. In Europe, the
economy is going through a challenging period with countries going through
different problems. Recent data show that Germany could enter a recession later
this year. Recent data on factory orders, manufacturing output, and industrial
production has been weaker than expected. In France, the country has been
facing riots as opposition to Emmanuel Macron mounts. This is threatening the
pace of recovery. In Italy, the country is now in a recession. Other European
countries too are not doing well. This means that the bank could take a longer
period before it increases rates.

In Japan, the second-biggest
constituent of the dollar index, all is not well. Recent data shows that the
country’s rate of inflation has remained below the 2% target. While the
unemployment rate has been low, it has not translated to more consumer
spending. The country’s efforts to stimulate this spending has not been
effective either.

In the United Kingdom, the
economy is going through a difficult period as Brexit continues to cloud the
economy. Indeed, the economic data released yesterday showed that the country’s
economy grew by the slowest pace in years in the fourth quarter. This was caused
by a number of factors such as low capital investments and low consumer
spending. The sluggish growth will likely continue as the uncertainty on Brexit
continue.

The weakness is also happening in
Canada, Switzerland, and Sweden, the other components of the dollar index.

On the other hand, the US economy
is doing pretty well. Inflation has been contained while the economy has
continued to add jobs. In fact, in the past two months, the non-farm payrolls
have increased by more than 300K, which is a record. Wages are growing and
corporate profits are doing good too. The country is also negotiating a trade
deal with China, that has the potential of accelerating the growth in the
country.

Therefore, while the Fed has
announced that it will be patient, the truth is that it is still hawkish on the
economy. This could see it do one or two hikes this year. As such, there is a
likelihood that the USD index will continue moving up.

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