How High Will the Dollar Go?

The US dollar is approaching an 11 year high against the Euro as reported by Reuters. This happens as the US economy continues to pick up steam and the Euro Zone waits for quantitative easing to start.

The euro crashed through support levels that had held for more than a month on Wednesday, hitting a six-week low under pressure from the imminent launch of outright quantitative easing by the European Central Bank.

The dollar, bolstered by recent rises in U.S. government bond yields, hit its highest since September 2003 against the basket of currencies used to measure its broader strength.

There has been more momentum behind the greenback in the past week after a month of mediocre data which had left it struggling to build on six months of gains against all of its major currency peers.

The USD is up nearly six percent this year against a basket of currencies. How high will the dollar go? That depends on the price of oil, the Chinese economy and just how strongly the Euro Zone decides to stimulate by purchasing bonds (quantitative easing).

How Long Will Oil Stay Down?

The Forex Factory says that the USA is running out of room to store oil which is likely going to drive prices lower.

The U.S. has so much crude that it is running out of places to put it, and that could drive oil and gasoline prices even lower in the coming months. For the past seven weeks, the United States has been producing and importing an average of 1 million more barrels of oil every day than it is consuming. That extra crude is flowing into storage tanks, especially at the country’s main trading hub in Cushing, Oklahoma, pushing U.S. supplies to their highest point in at least 80 years, the Energy Department reported last week.

The US dollar has benefited from cheap oil while oil exporting nations have been hurt. Despite the glut in oil no one seems to want to cut back. The Saudis claim that they do not want to lose market share and US producers awash in oil from new fracking technology want to make money to pay back their investment in the new technology. It would seem that the demand side needs to pick up and that will depend on Japan, Europe and China.

Slowing Chinese Economic Growth

China experienced years of double digit growth and that seems to be coming to an end. With slowing exports and slowing factory production Bloomberg notes that China is positioning itself to cushion its economy against a hard landing.

China showed its determination to combat a slowdown in the world’s second-largest economy, cutting interest rates before a yearly gathering of the legislature where the Communist leadership typically unveils its goals for the year.

The People’s Bank of China announced a benchmark lending and deposit rate cut of a quarter percentage point Saturday. A day later, a factory gauge for February signaled contraction for a second month, underscoring the need for looser policy.

The easing saw China join counterparts from Europe to Canada to Southeast Asia in taking steps against deflationary pressures, and will probably be followed by a reduction in the amount of money banks must hold in reserve, according to analysts including at Goldman Sachs Group Inc. Economists expect Premier Li Keqiang will announce a growth target of around 7 percent for 2015, down from 7.5 percent last year.

“2015 will be another difficult year for China’s cyclical and structural adjustment,” said Chang Jian, chief China economist at Barclays Plc in Hong Kong. “Further monetary easing will help prevent a downward growth and deflation spiral, but is unlikely to lift growth significantly.”

When the Chinese industrial machine slows down, so do imports of raw materials including oil and natural gas. How high will the dollar go? The question might be how far the Chinese currency will fall!