3 reasons why the dollar suddenly dropped and why it will recover

Jun 01,2019 04:31   Source:Forex Crunch
  • The US Dollar has been falling sharply, reversing previous gains.
  • Trade wars usually favor the safe-haven greenback, but this time is different. 
  • There are three main reasons for the downfall.

EUR/USD has escaped the abyss, GBP/USD seemed to have forgotten about Brexit, and even commodity currencies have rallied against the greenback.

The US dollar is a safe-haven currency, second only to the Japanese yen. US President Donald Trump has reopened the North American trade front by threatening Mexico with fresh tariffs as a punishment for allowing a migrant flow into the US. The trade war with China has also intensified with defiant rhetoric from Beijing and a threat to block rare earth exports to the US.

Stock markets are plunging and the yen is on the rise. But the USD has suddenly turned around.

What is going on?

1) Rate cut coming?

The deteriorating relations between the US and its peers have also sent investors to the safety of US bonds – sending yields lower. However, that has happened before the recent dollar downing.

Bond markets have already begun pricing in a rate cut, but the greenback’s fall was partially triggered by commercial banks that announced changes to their forecasts – bringing projections forward. And that was triggered by the trade war. JP Morgan has stood out with

2) Profit-taking

The US dollar may have gone too fast and too far and the end of the month is a perfect time to take profits – especially on a Friday.

Retail traders and investors alike want to clean their positions before the weekend.

3) A downgrade in US consumer confidence

After GDP was downgraded on Thursday – and especially with the inflation component suffering a negative revision – the University of Michigan’s consumer confidence also dropped.

While it is not a top-tier figure, it has the privilege of having the last word of the week. A small downgrade was enough to add fuel to the fire.

Why it will not last

The greenback’s status as a safe-haven has not changed. When the US economy sneezes, the rest of the world catches a cold. And that is when money flows back to the US. There has been no fundamental shift.

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