US Federal Reserve powerless to halt dollar’s decline

The fall came despite the US Federal Reserve continuing its tapering of quantitative easing reducing it by a further US$10 billion.

Following some gains in May the US dollar tumbled in June, losing value to almost all currencies. The most significant changes were against the New Zealand dollar, British pound and the euro. However, it did appreciate against the Norwegian krone, going up by 2.24 per cent.

This fall came despite the US Federal Reserve continuing its tapering of quantitative easing (QE) reducing it by a further US$10 billion. This leaves the financial stimulus programme at $35bn a month with a further reduction of $10bn still planned for July. A downside of the tapering programme is that inflation has started to rise, a situation which could be heightened by the tensions in Iraq. This is a concern as the US dollar failed to stabilise and the Dollar Index fell below 80.0 after failing to break above its 50-week moving average.

There is still talk of the slowdown being related to poor weather conditions at the start of the year, but forecasters who favoured this explanation estimated that GDP would shrink by 1.8 per cent. However, the first-quarter final GDP showed that the economy shrank by 2.9 per cent and most major banks now are cutting the GDP growth forecasts for the rest of the year. The Fed’s GDP target will not be achieved unless the economy grows by more than 5 per cent in each quarter until the end of the year.

This month will be very important for both the Fed and global markets. It is faced with rising inflation and falling GDP, and not many options. Pausing the tapering process would continue to push inflation even higher while ending QE may drag the economy into another recession.

Therefore this month’s decision is a close call and should be watched carefully as it might act as a game changer for the markets and the entire economy. It is hard to predict how the Fed will deal with this situation so we must wait and see. The problem for in trying to suggest what the Fed will do is not helped by its own predictions. Since 2009 all their growth forecasts have been incorrect.

We have been warning the markets about the issues facing the Fed from before the start of the year, and the problem seems no closer to being decided or resolved. This will fuel the uncertainty which has created the unusual trading conditions of the past few months.

At the start of 2014 most banks warned about buying gold this year, however commodities have shown that they are a safe haven investment. Gold and silver are among the best performers this year, even in June. Silver has been the best performer with gains of than 13.15 per cent, while gold was the fourth best performer in June after live cattle and zinc.

Gold’s monthly chart is showing a clear reversal after closing with a bullish “engulfing candle” which has been produced in just one year. This suggests that gold’s recovery is likely to continue in the next few months. The key resistance remains at $1,330 followed by $1,350 while buying through those levels may clear the way for a further gains towards $1,400.

Nour Eldeen Al Hammoury is the chief market strategist at ADS Securities

Follow us on Twitter @Ind_Insights