The Recent Plunge of the US Dollar and Its Implications
The US dollar experienced a sharp decline last week, losing over 3.5% and dropping below 104.0 levels, almost wiping out the gains made since Trump’s election. This downward trend has been ongoing since early February and escalated at the beginning of this month. Despite an attempt to rise above the 50-day average in February, increased selling pressure pushed the price below the 200-day average this week.
Reasons Behind the Dollar’s Decline
Many attribute the dollar’s decline to Trump’s tariffs, but it is more accurately described as a reassessment of expectations for the US key rate. The likelihood of two or more key rate cuts by the end of the year now stands at over 90%, a significant increase from 48% just two weeks ago. This shift is related to a substantial EU defense spending plan and a significant change in budget planning approaches in Germany, leading to reduced expectations for a key rate cut.
Impact on Currency Markets
The news of potential key rate cuts has caused the single currency to rally against major peers, particularly the dollar, with a 4.5% increase since the week began. Moreover, higher-than-expected inflation in Japan is setting the stage for a key rate hike, possibly as early as March 19th. The monetary policy gap is narrowing rapidly on both ends, signaling significant changes in the global currency market.
Indices Performance
US indices typically move in the opposite direction of the dollar but experienced declines alongside it last week. While this may seem concerning, there are positive signs as well. The S&P500 and Nasdaq indices found support near their 200-day moving averages, which are crucial trend signal lines for many investors. However, a failure to hold above these levels could indicate a shift in market sentiment from ‘buying dips’ to ‘selling highs.’
The S&P500 has already broken a year-and-a-half upward trend and is hovering near 5700 levels, testing the resilience of buyers. A breach of this support could trigger a rapid downside movement towards the 5200-5300 range. On the other hand, the Nasdaq100, currently near 20000, may face minimal resistance until 18000 in case of a sustained decline. Recovery from this level could pave the way for new highs, driven by oversold conditions boosting investor confidence.
European Market Dynamics
In contrast to the US market, the German DAX40 has been setting record highs, with an 18% increase since the year began. The new government’s stimulus plans, coupled with relaxed budget constraints and debt-to-GDP ratios, have spurred a rally in equities and euros. The sell-off in bonds is not due to solvency concerns but anticipation of increased government debt supply. This influx of capital into the region signifies a positive outlook, contrasting with past crises like the Greek debt debacle.
In conclusion, the recent developments in the currency and equity markets highlight the interconnectedness of global financial systems. Factors such as key rate expectations, government spending plans, and market sentiments play a crucial role in shaping investment decisions and asset performance. Understanding these dynamics is essential for investors to navigate the evolving landscape and make informed choices for their financial future.