US Dollar Price Remains Supported Heading into FOMC Meeting

US DOLLAR NEWS AND TECHNICAL ANALYSIS:

• US dollar haven bid fades as President Trump applies tariffs.
• USD will remain supported as interest rates are raised.

US DOLLAR JUGGLING TRADE TARIFFS, FOMC AND US TREASURY YIELDS

The US dollar index (DXY) touched a six-week low Monday and broke through a noted technical support level before rebounding higher. The original fade lower came on the back of news that the US would impose tariffs on $200 billion of Chinese imports at a rate of 10%, not 25% as originally thought. The USD’s haven allure reappeared after China said that it would retaliate against the latest round of tariffs which come into effect next week. The US tariffs will increase to 25% in January1 2019 unless the US - China trade imbalance has improved.

The Impact of Tariffs and Trade Wars on the US Economy and the Dollar.

As trade wars rear their head again, US Federal Reserve speakers are in a self-imposed purdah and can say nothing ahead of next week’s FOMC meeting, where a 0.25% rate hike is fully expected. The Fed has raised rates twice already this year and is also expected to hike again at the December meeting, making a total of four hikes, or 1%, in 2018.

Interest Rates and the FX Market

This tightening US monetary policy can be seen clearly in the US Treasury market, especially the short-tend where yields are trading at decade highs. The interest-rate sensitive 2-year UST currently yields 2.78%, a level last seen at the start of 2008, and is expected to break 3% over the next few months as the Fed normalizes monetary policy further. This will continue to support the greenback as investors chase higher-yielding short -term assets.

The US dollar is currently supported by Fibonacci retracement at a fraction under 94.00 while the 93.70 – 93.85 zone has also held firm since early July. A break lower could see the July 9 low at 93.33 come into view. On the upside 94.50 – 94.80 zone is important ahead of 95.20.

US DOLLAR INDEX (DXY) DAILY PRICE CHART (JANUARY – SEPTEMBER 18, 2018)

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