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|16 April, 2019

Is the dollar running on borrowed time?

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

The IMF's recent cut to its forecast of growth in the U.S. economy is just one of a number of issues that could weaken sentiment against the dollar

It is becoming evident that market optimism over the resilience of the economy of the United States in such unfavourable global conditions has stimulated appetite for the dollar.

The perception that the U.S. remains in better shape in comparison to everyone else has transformed the greenback into a destination of safety in times of uncertainty. Although the dollar held up relatively well during the first quarter of 2019 despite a dovish Fed, there is a strong suspicion that the currency is running on borrowed time, given its performance in April.

While 'King Dollar' may find further support from safe-haven flows as global growth fears, Brexit and geopolitical risk strain sentiment, this alone may not be enough to keep the currency buoyed in the medium-to-longer term. With the Federal Reserve adopting a “patient” and “flexible” approach towards monetary policy, and mixed economic data from the U.S. in recent months, most of the themes supporting dollar bulls are slowly fading.

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It was only back in March that the U.S. Treasury yield inverted for the first time since 2007 – a development that flashed warning lights over the largest economy in the world potentially entering a recession. Lingering concerns over the health of the U.S. economy will not only weigh on the dollar but threaten its status as a safe-haven asset in times of uncertainty. With speculation over the Fed potentially cutting interest rates in the future seen as threatening the dollar’s competitive advantage, the currency’s outlook points in favour of bears.

As the second quarter gets underway, King Dollar is seen facing a barrage of headwinds in the form of fading fiscal stimulus, ongoing political drama and repeated signs of decelerating economic growth in the United States. The fact that the IMF has cut its projections for the US economy this year from 2.5 percent to 2.3 percent continues to highlight how the dollar is running on fumes.

Across the board, there are several catalysts that could potentially cause the dollar to collapse like a house of cards. This could come in the form of President Trump’s criticising the Federal Reserve or even talking down the dollar. Flattening yield curves in the United States coupled with disappointing economic data may enforce further downside pressure on the dollar. In regards to the technical picture, the Dollar Index (DXY) has repeatedly failed to break above the 97.70 resistance level. If this point continues to be a reliable resistance, then prices are seen slipping back towards 93.00 in the medium-to-longer term.

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