The US Dollar has been on the spotlight since beginning of the year as momentum has surprised everyone. Retracements continue to be shallow. The dollar bullish trend is well mature on its own and I thought it's the perfect time to reinforce my view on the dollar as many are asking: what's next for the US Dollar?

This is the US dollar's fastest rise in 40 years, and the US Dollar was up on one point 14% on this year alone, and I was one of the few to speak about the dollar rally, even before the trend to be put in motion.

Explaining the dollar's incredible turnaround, at current speed and velocity is not quite hard to explain if you have been following my articles. There are plenty of evidences, from my side, as I was preparing for this kind of move. To understand better what it's happening with the dollar i'll suggest to go over and re-read my previous articles here:



This blog post main objective will be to give you a road-map of next US Dollar phase and what to expect next. In this regard we're going to look on both fundamentals and techincals to try understand better the trend in motion.


  • The US Dollar Fundamentals

Part of the broad based dollar strength across the board is the huge divergence in monetary policy between the major Central Bank around the world.
Figure 1. Volatility across different assets classes


One element that makes the dollar going so high is the "risk element" that we're measuring in the markets. Volatility as a measure of risk trends is up for many different assets classes (see Figure 1 ) however it's the FX volatility in particular who has picked up and it's keeping its strength (see Figure 2) There is uncertainty in the FX market and lots of volatility due to major central bank policy changes like: SNB abandoning the 1.2 EUR/CHF peg, many CB cutting key interest rates (24 central bank rate cuts--> Global easing) and this uncertainty leads to risk which in turn makes capital shift towards a more stable currency which is the US Dollar as it can absorb huge quantity of money due to his large liquidity pool which makes it the only game in the town.

Figure 2. FX Volatility vs. US Dollar


The weak counterparts like the EURO is also contributing to the broad based dollar strength as the monetary policy divergences are a good reflection of the dollar strength. FED has also come one step closer towards first rate hike after removing the word"patience" from FOMC statement. But even thought they downgraded their economic forecasts from GDP, inflation and unemployment they are still on the path towards interest rates normalization cycle and if history is to provide any guide than we can use the last rate hike cycle to judge how things may unfold (see Figure 3) and based on the 2004 rate hike cycle, FED has proceeded with a rate hike in Jun, however it may be the case that this time around we may have a delay as the Fed funds rate suggest a first rate hike in September.
Figure 3. 2004 Rate Hike Cycle Timeline

Fed is one of the few major central banks around the global that is leaning toward tightening, which is in great contrast with other major CB like ECB, BOJ, PBOC which are easing and because of this precise divergence the US dollar has gain lot of traction.

The US Dollar is already up 14% on this year alone and it has an impressive run and even though in the short term the move may look like overbought, fundamentally speaking there is more space to the upside. The dollar bullish trend is still mature and the macro outlook remains unchanged in the long term, but noting goes in a straight line and corrections or at least a pause in the trend are healthy for the market and the overall stability of the trend.

Stay tuned as this is just the first part because tomorrow we're going to look over the technicals as well as the US dollar super cycles in order to have a better view on the market.

Best Regards,
Daytrader21
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