U.S. Dollar Holding Strong as Trade Concerns Push Investors into Safe Havens

Alan Penny

30 May 2019

3 min read

US dollar holds

Thursday saw the U.S. dollar maintain its gains against a basket of currencies as an increasing number of investors sought refuge in the greenback amid continuing fears over global trade issues.

The U.S. dollar has long been a safe haven currency for investors, a fact that was made even more clear with the greenback inching towards two-year highs.

Thus, the U.S. dollar index amounted to 98.132, which is just shy of the 98.371 it hit last week. The latter is the highest the index has been in two years, after experiencing gains of over 2% this year.

U.S. – China Trade Tensions Show No Signs of Easing

The situation between the U.S. and China regarding trade talks shows no sign of coming to a mutually beneficial resolution any time soon. In fact, things seem to be getting worse. This, of course, has led to pessimistic market sentiment, with investors retreating into safe-haven assets as their appetite for risk has dropped sharply.

Michael McCarthy, CMC Markets’ chief market strategist, posited that the market is worried about the trade tensions and their potential effect on the “outlook for global growth.” He further stated that the economic data to be released over the next day will either confirm or assuage market fears.

Tensions between China and the U.S. continue to climb. President Donald Trump stated that he was not ready yet to make a deal with China. Following this statement, on Wednesday, the Chinese press pointed out that they could retaliate against the U.S. using rare earth exports.

On Thursday, China’s Vice Foreign Minister, Zhang Hanhui, pointed the finger at the U.S., stating that their strategy of ramping up trade issues is “naked economic terrorism.”

Investors Waiting for U.S. GDP and Jobless Claims Data

Investors are waiting to see the growth and jobless claims figures that are to be published later in the day. Analysts believe that risk sentiment might improve with the results, especially considering that there is little chance for the U.S. economy to end up in a recession.

The U.S. dollar might experience some volatility, though, as tensions ramp up between the United States and the European Union due to their diverging approach towards the Iran situation.

This disagreement resulted in the creation of a Special Purpose Vehicle by European member states that allows companies based in Europe to bypass sanctions imposed by the U.S. on Iran. The SPV allows transactions to be conducted in other currencies than the U.S. dollar.

U.S. officials stated on Thursday that this could lead to the U.S. imposing sanctions on the European Union as a penalty if they don’t cease and desist.

On the back of the announcement, the price of crude oil jumped as investors are worried that disruptions in supply could become a reality.

The U.S. dollar could experience volatility on the back of today’s data releases. U.S. economic data has been missing the mark in terms of market expectations since February.

The consistent underperformance of the U.S. economy has led to the Fed shifting to a neutral outlook from the hawkish stance they had previously adopted. Thus, the central bank is in a holding pattern, waiting to see if a rate increase is warranted.

The U.S. dollar could therefore experience a somewhat greater degree of volatility due to the GDP data as the results could push the Fed into switching from a neutral stance to a more dovish or hawkish one.

Written By
Alan Penny

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