Has the Dollar Correction Come to an End?

This past weekend saw the dollar rise from a near three-month low amid signs that U.S. consumer spending remains strong.

The greenback advanced versus most of the other major currencies, snapping four days of losses versus the yen, as a Commerce Department report showed retail sales had increased more than forecast in January. The currency rose from its weakest since October 2014.

At her testimony in front of Congress last week, Federal Reserve Chair Janet Yellen was firm in her decision to raise rates for the first time in a decade. Rather she reiterated that the central bank is monitoring incoming data and will raise rates at a gradual pace when and if necessary. Her admission helped the dollar trim the third loss in so many weeks. Global slowdown and concerns over the creditworthiness of some European banks had reduced the outlook for tighter U.S. monetary policy.

This past weekend saw the dollar rise from a near three-month low amid signs that U.S. consumer spending remains strong

FMOC Minutes This Week

The minutes from the FMOC meeting will be released this week but some analysts are dismissing the importance of economic data as an important factor in forecasting the future of the dollar. Many are looking for some sort of event or official action that will stop the rout that has already reached historic proportions since the start of the year. None of the frequently mentioned events, such as an agreement to cut oil output, or for a coordinated policy response by the major countries, are probable.

Some analysts are reading the dollar’s collapse against the euro and the yen as reaching its end. They point out that the U.S. Dollar Index is heavily weighted toward Europe and is not representative of U.S. trade flows. Two of America's four largest trading partners, Mexico and China, are not even included in the Index. According to their data, European and U.S. markets have shown signs of stabilizing at the end of last week.

Many investors disagree with this assessment. The measure of the greenback’s momentum against the yen, known as the 14-day relative strength indicator, has dropped below 30, the level that some traders view as a signal the currency has reached extreme levels and may reverse. A similar gauge for the currency versus the euro also remains near a level that suggests weakness is extreme.

Some market analysts believe that the yen's strength is not a sign that monetary policy is no longer effective. They suggest that it has been dazed by the winding down of funding and hedge positions. According to them, nearly all measures indicate that the more than 10 yen decline to the dollar since the start of the month is extreme.

Asia Markets Return

Asian markets, including China, have been closed during the past week and their absences have not been factored into the latest weekly data. And despite the fact that their return poses some risks, China’s central bank governor, Zhou Xiaochuan, said prior to Monday’s market re-openings, that there

was no basis for the continued depreciation of “the yuan as the balance of payments is good, capital outflows are normal and the exchange rate is basically stable against a basket of currencies.”

According to Zhou, the bank will not let "speculative forces dominate market sentiment," and that “a flexible exchange rate should help efforts to combat speculation by effectively using ‘our ammunition while minimizing costs.’"

When it comes to oil prices and where they will bottom out, energy experts seem to be pessimistic about a near-term agreement among oil producers to cut output. However, they see some sort of an underside in the current process being carved out and look towards a move back above $30 as the first constructive sign of a turn around.

So the answer to whether the dollar’s correction is coming to an end remains unanswered.

According to Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington, “As the data comes out, and if it continues to suggest relative strength in the U.S., then you could start to build a case for a floor in the dollar.”

Cina Coren
Cina Coren is a former Wall Street broker and financial advisor. She holds a Master's degree in Communications and spent many years writing for international news outlets and journalistic publications. Today, Cina spends most of her time writing internet articles and blogs, and reading various newspapers to stay on top of the news.