Strong USD Creates Market Headwinds

While Wall Street has been focused on trade talks and diplomatic tensions over the summer, the U.S. dollar has quietly crept to its highest levels of the year.

The DXY U.S. dollar index, which measures the greenback against a basket of currencies, has surged since April lows to hold year-to-date highs through July.

Speaking with CNBC’s “Trading Nation,” Michael Binger, senior portfolio manager at Gradient Investments, warns investors not to ignore the headwinds created by a surging U.S. dollar.

A stronger U.S. economy relative to international economies has contributed to the dollar rally, while trade tariff rhetoric has pushed investors to seek out the currency as a safe haven asset.

The U.S. trade deficit will likely rise as consumers take advantage of a strong dollar to buy an increased amount of overseas goods and services.

Emerging markets will continue to feel pressure as it becomes more expensive in a local currency to purchase dollar-based commodities and debt.

U.S. multinationals will also get squeezed. Companies that generate revenues overseas have to convert international sales back into U.S. dollars, reducing the overall amount.

Longer term, the dollar should move lower than where it is today, due to the large U.S. trade deficit and mean reversion of international interest rates and economic growth.

In the short term, the continued strength in the dollar could persist.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza