Recent USD Rally… Why?
With mixed news coming out of the world’s remaining superpower in recent weeks, the recent US dollar rally induced widespread befuddlement. With Europe suddenly looking economically worse-off than America, it is easy to understand why the USD has rallied against the EUR. However, the USD has rallied against many of the major currencies, including the JPY and the CHF. In other words, it is not only bad news coming out of the Euro-Zone that is fueling this USD rally. So, the important question is what exactly is causing this rally?
One obvious corollary is oil prices. Having fallen about $20 (or about 15%) in the past week or so, relaxed oil tensions have allowed the USD to achieve solid gains. However, the Forex market is rarely so simple in its explanations of cause and effect, so it would be unwise to solely attribute this USD rally to oil prices. However, the main theory that I am proposing is related very closely to oil prices, whose unprecedented levels are causing rising inflation all throughout the globe.
The hidden culprit, I believe, is foreign government entities. As the bulk of the commodity world — including oil — is priced in US dollars, the weakened state of the USD has been a primary component of the widespread inflation. The issue of permanently lowering oil costs (or oil demand) has not dissipated by any stretch. In lieu of a radical shift in the energy industry, however, is a simpler, temporary solution: a stronger USD. As countries have come to witness the terrible effects that the oil situation is wreaking on their economies, I believe that they are beginning to act in a manner to try to build up the USD.
It is unclear if the past few days are indication of any real changes or if they are just testament to the EURUSD being in a range-bound market. However, if the USD continues to rally and oil continues to fall, then perhaps we could be witnessing a long-overdue correction. Should that occur, inflation concerns could begin to lessen, and then central banks might be able to focus more on fixing other problems. As always, only time will tell.
EUR German IFO Current Assessment (Jul)
EUR Euro-Zone Current Account (May)
GBP Retail Sales (Jun)
JPY Consumer Price Index (Jul)