Dollar downed: Three reasons for the USD sell-off and why it cannot last

The US Dollar has been falling sharply, reversing previous gains.
Trade wars usually favor the safe-haven greenback, but this time is different.
There are three main reasons for the downfall.

Yohay Elam FXStreet

EUR/USD has escaped the abyss, GBP/USD seemed to have forgotten about Brexit, and even commodity currencies have rallied against the greenback.

The US dollar is a safe-haven currency, second only to the Japanese yen. US President Donald Trump has reopened the North American trade front by threatening Mexico with fresh tariffs as a punishment for allowing a migrant flow into the US. The trade war with China has also intensified with defiant rhetoric from Beijing and a threat to block rare earth exports to the US.

Stock markets are plunging and the yen is on the rise. But the USD has suddenly turned around.

What is going on?

1) Rate cut coming?

The deteriorating relations between the US and its peers have also sent investors to the safety of US bonds – sending yields lower. However, that has happened before the recent dollar downing.

Bond markets have already begun pricing in a rate cut, but the greenback's fall was partially triggered by commercial banks that announced changes to their forecasts – bringing projections forward. And that was triggered by the trade war. JP Morgan has stood out with

2) Profit-taking

The US dollar may have gone too fast and too far and the end of the month is a perfect time to take profits – especially on a Friday.

Retail traders and investors alike want to clean their positions before the weekend.

3) A downgrade in US consumer confidence

After GDP was downgraded on Thursday – and especially with the inflation component suffering a negative revision – the University of Michigan's consumer confidence also dropped.

While it is not a top-tier figure, it has the privilege of having the last word of the week. A small downgrade was enough to add fuel to the fire.

Why it will not last

The greenback's status as a safe-haven has not changed. When the US economy sneezes, the rest of the world catches a cold. And that is when money flows back to the US. There has been no fundamental shift.

Author

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

GBP/USD bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold slips back to six-day lows, targets $4,100

Gold retreats for the third consecutive day on Friday, eroding gains seen in the first half of the week and approaching the key $4,100 mark per troy ounce. Indeed, the precious metal continues to face headwinds from the Fed's hawkish stance and renewed uncertainty surrounding the next round of US-Iran negotiations.

Solana extends correction despite ETF inflows, RWA adoption

Solana (SOL) price edges below $70 extending its losses for the fourth straight day this week. The institutional demand for Solana is building, with steady inflows so far this week and Morgan Stanley’s amended S-1 filing for a Solana-focused Exchange-Traded Fund.

The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.