US Dollar Is Currently On A 60 Month High

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U.S. Dollar Hits 19-Month High: 5 Top Domestic Picks

Nalak Das December 17, 2020

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The U.S. dollar is currently hovering around a 19-month high. A robust U.S. economy has compelled the Fed to adopt a hawkish stance policy with the strong likelihood of a fourth rate hike this year in December. At the same time, U.S. products are losing competitiveness in the international market due to a strong dollar.

Moreover, weaker-than-expected economic data from China and the European Union and concerns about emerging markets’ ability to service their external debt have raised the possibility of global slowdown. Consequently, it will be prudent to invest in domestic business-focused stocks with a favorable Zacks Rank.

US Dollar Index Hits 19-Month High

On Dec 14, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, touched 97.71, its highest level since May, 2020.

Demand for the dollar intensified after the Fed signaled a possible rate hike in December amid fears of a global economic slowdown. Moreover, geopolitical conflicts in the UK and Italy resulted in decline in the value of the pound and the euro compared with the U.S. dollar.

Tepid Economic Outlook for China and Eurozone

A series of weak economic reports, recently released by the Chinese authorities and several countries of the European Union have raised serious questions about an impending economic slowdown in these countries.

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On Dec 14, National Bureau of Statistics of China reported that industrial output grew 5.4% year over year in November, its slowest pace in almost three years. Chinese retail sales rose 8.1% year over year in November, marking its weakest growth rate since 2003. Most of the economists think lingering trade related conflicts with the United States is the primary reason for slow pace of economic growth in China.

Meanwhile, the European Central Bank (ECB) has lowered its growth forecast for the European Union (EU) for both 2020 and 2020. The new growth rate of 2020 is now projected at 1.9% compared with 2% forecasted earlier. Similarly, 2020 growth rate is now pegged at 1.8%, down from 1.9% projected earlier. Notably, this is the second time in the past three months that the ECB has lowered growth forecast for the EU.

Concerns Relating to Emerging Markets

Emerging markets are characterized as major borrowers of international debts (external commercial borrowing). Since the debts have to be repaid in dollar terms, servicing these debts while managing fiscal discipline becomes difficult for these countries.

Moreover, refinancing of debts, which are on the verge of maturity, becomes problematic owing to soaring interest costs. With the dollar continuing to surge, heavy debt servicing liabilities may lead to economic slowdown in emerging markets resulting in global economic slump.

Why Domestic Stocks?

Investors are concerned that a rising dollar will hurt sales of U.S. multinational companies as their products will be more expensive in the international markets. Notably, in 2020, S&P 500 companies had derived 43.6% of their total revenues from international markets. Domestic business oriented companies are mostly immune to any external shocks since the United States is the lone market for their products. This will help them to outperform the broader market defying extreme volatility.

Our Top Picks

At this juncture, investment in domestic business-focused stocks will be fruitful. We have narrowed down our search to five such stocks each having a Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

1st Constitution Bancorp ( FCCY – Free Report) is one of New Jersey’s few independent community banks in the United States. The company has expected earnings growth rate of 50% for the current year. The Zacks Consensus Estimate for the current year has improved 8.9% over the past 60 days.

Middlesex Water Co. ( MSEX – Free Report) treats, stores and distributes water for residential, commercial, industrial and fire prevention purposes. The company has expected earnings growth rate of 42% for the current year. The Zacks Consensus Estimate for the current year has improved 6.5% over the past 60 days.

Molina Healthcare Inc. ( MOH – Free Report) provides Medicaid-related solutions to meet the health care needs of low-income families and individuals, and to assist state agencies in their administration of the Medicaid program in the United States. The company has expected earnings growth rate of 1,551.8% for the current year. The Zacks Consensus Estimate for the current year has improved 25.2% over the past 60 days.

Northrim BanCorp Inc. ( NRIM – Free Report) is a full-service commercial bank that provides a full range of personal and business banking services. The company has expected earnings growth rate of 44.6% for the current year. The Zacks Consensus Estimate for the current year has improved 3.5% over the past 60 days.

Meridian Corp. ( MRBK – Free Report) provides commercial banking products and services for retail and commercial customers primarily in south-eastern Pennsylvania, Delaware, and south New Jersey. The company has expected earnings growth rate of 105.8% for the current year. The Zacks Consensus Estimate for the current year has improved 57.8% over the past 60 days.

In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2020?

These 10 are painstakingly handpicked from over 4,000 companies covered by the Zacks Rank. They are our primary picks poised to outperform in the year ahead. Be among the first to see the new Zacks Top 10 Stocks >>

US Dollar (DXY) Touching a Two-Month High

US Dollar (DXY) News and Price:

  • US dollar remains strong due to a strong economic backdrop.
  • Fed speakers and the Beige Book may push the greenback even further.

US Dollar (DXY) Pressing Higher

The US dollar remains a ‘ buy on dips ’ market and is now touching levels last seen two months ago as US monetary policy continues to tighten. The Federal Reserve is expected to raise interest rates by another 0.25% in December, the fourth increase this year, and the market is currently pricing in another 3 rate hikes for next year.

Ahead this week, a handful of Fed speakers give their latest views on the economy along with the release of the Federal Reserve’s Beige Book on Wednesday. On Tuesday, the Fed’s Kashkari, Bostic and Kaplan speak at various events, while on Wednesday, the Fed’s Bostic, Mester and Brainard opine. These Fed speakers, and the Beige Book, are likely to emphasize the current strength of the US economy, boosting the greenback further.

The US dollar basket (DXY) is currently just off levels last seen in mid-August and below the 50% Fibonacci retracement level at 95.87. This guards the recent 16-month high of 96.60, made on August 15, while the downside is protected by all three moving-averages.

US Dollar Basket (DXY) Daily Price Chart (December 2020 – October 23, 2020)

Traders may be interested in two of our trading guides – Traits of Successful Traders and Top Trading Lessons – while technical analysts are likely to be interested in our latest Elliott Wave Guide .

What is your view on the US Dollar – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author at [email protected] or via Twitter @nickcawley1 .

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

US Dollar Value Measured Three Different Ways

Where Is the Dollar’s Value Headed Next?

Image by Catherine Song. © The Balance 2020

The value of the U.S. dollar is measured in three ways: exchange rates, Treasury notes, and foreign exchange reserves. The most common method is through exchange rates. You should be familiar with all three in order to understand where the dollar is headed next.

Exchange Rates

The dollar exchange rate compares its value to the currencies of other countries. It allows you to determine how much of a particular currency you can exchange for a dollar. The most popular exchange rate measurement is the U.S. Dollar Index.

These rates change every day because currencies are traded on the foreign exchange market. A currency’s forex value depends on many factors. These include central bank interest rates, the country’s debt levels, and the strength of its economy. When they are strong, so is the value of the currency. The Federal Reserve has many monetary tools that can influence the strength of the dollar. These tools are how the government can regulate exchange rates, albeit indirectly.

Most countries allow forex trading to determine the value of their currencies. They have a flexible exchange rate. The U.S. dollar rate dollar rate shows the value of the dollar in comparison to other currencies, including the Indian rupee, Japanese yen, Canadian dollar, and the British pound.

Below, you can track the dollar’s value as measured by the euro since 2002.

This chronology explains why the dollar’s value changed.

2002-2007: The dollar fell by 40% as the U.S. debt grew by 60%. In 2002, a euro was worth $0.87 versus $1.44 in December 2007. 

2008: The dollar strengthened by 22% as businesses hoarded dollars during the global financial crisis. By the year’s end, the euro was worth $1.39.

2009: The dollar fell by 20% thanks to debt fears. By December, the euro was worth $1.43.

2020: The Greek debt crisis strengthened the dollar. By the year’s end, the euro was only worth $1.32.

2020: The dollar’s value against the euro fell by 10%. It later regained ground. As of December 30, 2020, the euro was worth $1.30.

2020: By the end of 2020, the euro was worth $1.32 as the dollar had weakened.

2020: The dollar lost value against the euro, as it appeared at first that the European Union was, at last, solving the eurozone crisis. By December, it was worth $1.38.

2020: The euro to dollar exchange rate fell to $1.21 thanks to investors fleeing the euro.

2020: The euro to dollar exchange rate fell to a low of $1.05 in March, before rising to $1.13 in May. It fell to $1.05 after the Paris attacks in November, before ending the year at $1.08.

2020: The euro rose to $1.13 on February 11 as the Dow fell into a stock market correction. It fell further to $1.11 on June 25. This happened the day after the United Kingdom voted to leave the European Union. Traders thought uncertainty surrounding the vote would weaken the European economy. Later on, the markets calmed down after realizing that Brexit would take years. It allowed the euro to rise to $1.13 in August. Not long after, the euro fell to its 2020 low of $1.04 on December 20, 2020.

2020: By May, the euro had risen to $1.09. Investors left the dollar for the euro due to allegations of connections between President Trump’s administration and Russia. By the end of the year, the euro had risen to $1.20.

2020: The euro continued its ascent. On February 15, it was $1.25. In April, the euro began weakening after President Trump initiated a trade war. The euro fell to $1.16 on June 28, a few days after the Federal Reserve raised the fed funds rate to 2%. A higher interest rate strengthens a currency because investors receive more return on their holdings. But the by end of the year, the euro was $1.15.

2020: The euro declined until September when it reached $1.10. It rose briefly in December to $1.11. The euro followed news about the ongoing trade war.

Treasury Notes

The dollar’s value is in sync with the demand for Treasury notes. The U.S. Department of the Treasury sells notes for a fixed interest rate and face value. Investors bid at a Treasury auction for more or less than the face value and can resell them on a secondary market. High demand means investors pay more than face value and accept a lower yield. Low demand means investors pay less than face value and receive a higher yield. A high yield means low dollar demand until the yield goes high enough to trigger renewed dollar demand.

Before April 2008, the yield on the benchmark 10-year Treasury note stayed in a range of 3.91% to 4.23%.   That indicated a stable dollar demand as a world currency.

2008: The 10-year Treasury note yield dropped from 3.57% to 2.93% between April 2008 and March 2009 as the dollar rose. Remember, a falling yield means a rising demand for Treasurys and dollars.

2009: The dollar fell as the yield rose from 2.15% to 3.28%.

2020: From January 1 to October 10, the dollar strengthened, as the yield fell from 3.85% to 2.41%. It then weakened due to inflation fears from the Fed’s quantitative easing 2 strategy.

2020: The dollar weakened in early spring but rebounded by the end of the year. The 10-year Treasury note yield was 3.36% in January. It rose to 3.75% in February then plummeted to 1.89% by December 30.

2020: The dollar strengthened significantly, as the yield fell in June to 1.443%. It was a 200-year low. The dollar weakened toward the end of the year, as the yield rose to 1.78%.

2020: The dollar weakened slightly, as the yield on the 10-year Treasury rose from 1.86% in January to 3.04% by December 31.

2020: The dollar strengthened through the year, as the yield on 10-year Treasury fell from 3% in January to 2.17% by year-end.

2020: The dollar strengthened in January, as the 10-year Treasury yield fell from 2.12% in January to 1.68% in February. The dollar weakened as the yield rose to 2.28% in May. It ended the year at 2.24%.

2020: The dollar strengthened as the yield fell to 1.37% on July 8, 2020. The dollar weakened as the yield rose to 2.45% at year-end.

2020: The dollar weakened as the yield hit a peak of 2.62% on March 13. The dollar grew stronger as the yield fell to 2.05% on September 7. The yield rose to 2.49 on December 20, ending the year at 2.40.

2020: The dollar continued weakening. By February 15, the yield on the 10-year note was 2.9%. Investors were worried about the return of inflation. The yield remained in this range, rising to 3.09% on May 16 then falling to 2.69% by December.

2020: The dollar weakened as the 10-year yield peaked at 2.79% on January 18. But on March 22, 2020, the yield curve inverted. The 10-year yield fell 2.44%, below the three-month yield of 2.46%. That meant investors were more worried about the U.S. economy in three months than in 10 years. When investors demand more return in the short term than in the long run, they think the economy is headed for a recession. The yield curve recovered, then inverted again in May. On August 12 the 10-year yield hit a three-year low of 1.65%. That was below the 1-year note yield of 1.75%. It fell to a low of 1.47% on Sept. 4, 2020. Although the dollar was strengthening, it was due to a flight to safety as investors rushed to Treasurys. By the end of the year, it had risen to 1.92%.

Foreign Currency Reserves

The dollar is held by foreign governments in their currency reserves. They wind up stockpiling dollars as they export more than they import. They receive dollars in payment. Many of these countries find that it’s in their best interest to hold on to dollars because it keeps their currency values lower. Some of the largest holders of U.S. dollars are Japan and China.

As the dollar declines, the value of their reserves also decreases. As a result, they are less willing to hold dollars in reserve. They diversify into other currencies, such as the euro, yen, or even the Chinese yuan. This reduces the demand for the dollar. It puts further downward pressure on its value.

As of the fourth quarter of 2020, foreign governments held $6.7 trillion in U.S. dollar reserves.   That’s 61% of the total allocated reserves of $11.1 trillion. It’s down from a height of 66% held in 2020. It’s even less than the 63% held in 2008.

At the same time, the percentage of euros held in reserves was 21% in 2020. That’s less than the 27% held in 2008. Banks only held 2% of their reserves in Chinese yuan.

How the Value of the Dollar Affects the U.S. Economy

When the dollar strengthens, it makes American-made goods more expensive and less competitive compared to foreign-produced goods. This reduces U.S. exports and slows economic growth. It also leads to lower oil prices, as oil is transacted in dollars. Whenever the dollar strengthens, oil-producing countries can relax the price of oil because the profit margins in their local currency aren’t affected.

For example, the dollar is worth 3.75 Saudi riyals. Let’s say a barrel of oil is worth $100, which makes it worth 375 Saudi riyals. If the dollar strengthens by 20% against the euro, the value of the riyal, which is fixed to the dollar, has also risen by 20% against the euro. To purchase French pastries, the Saudis can now pay less than they did before the dollar became stronger. That’s why the Saudis didn’t need to limit supply as oil prices fell to $30 a barrel in 2020. The value of money affects you daily by how much commodities you can purchase with your funds at a given time. When prices for food or gas rise, your money’s value shrinks because a given amount can now buy less than what it used to.

The Value of the Dollar Over Time

The dollar’s value can also be compared to what could have been bought in the United States in the past. Today’s dollar value is much less than that of the past because of inflation.

The growing U.S. debt weighs on the back of the minds of foreign investors. In the long-term, they may continue to, little by little, move out of dollar-denominated investments. It will happen at a slow pace so that they don’t diminish the value of their existing holdings. The best protection for an individual investor is a well-diversified portfolio that includes foreign mutual funds.

From 2002 to 2020, the dollar declined. This was true with all three measures. One, investors were concerned about the growth of the U.S. debt. Foreign holders of this debt are always uneasy that the Federal Reserve would allow the dollar’s value to decline so that U.S. debt repayments would be worth less in their own currency. The Fed’s quantitative easing program monetized the debt, thereby allowing an artificial strengthening of the dollar. This was done to keep interest rates low. Once the program ended, investors grew concerned that the dollar could weaken. Two, the debt put pressure on the president and Congress to either raise taxes or slow down spending. This concern led to sequestration. It restricted spending and dampened economic growth. Investors were sent to chase higher returns in other countries.

Three, foreign investors prefer to diversify their portfolios with non-dollar denominated assets.

Between 2020 and 2020 the dollar strengthened. There were six reasons the dollar became so strong:

  1. Investors worried about the Greek debt crisis. It weakened demand for the euro, the world’s second choice for a global currency.
  2. The European Union struggled to boost economic growth through quantitative easing.
  3. In 2020, economic reform slowed China’s growth. It pushed investors back into the U.S. dollar.
  4. The dollar is a haven during any global crisis. Investors bought U.S. Treasurys to avoid risk as the world recovered unevenly from the 2008 financial crisis and recession.
  5. Despite reforms, both China and Japan continued to purchase dollars to control the value of their currencies. It helped them boost exports by making them cheaper.
  6. The Federal Reserve signaled that it would raise the fed funds rate. It did so in 2020. Forex traders took advantage of the higher rates as Europe’s interest rates declined.

Between 2020 and 2020, the dollar weakened again. In 2020, it strengthened as investors sought safety. They are growing ever-more concerned about the impact of the Trump administration’s trade war.

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