The US dollar has taken quite a beating over the past three months inducing many traders to wonder if this sharp verticalization is going to be over. In the last 30 days, the dollar has fallen over 700 pips against the Euro, 800 pips against the Japanese Yen and 1200 pips against the British pound. Only when we start to think that this movement must come to an end because it's become much too long, do we all realize that if we reach back into historywe can see that the dollar has more room to fall. Even though the US dollar has been gradually weakening since the end of 2005, the push has been triggered with the G7 comments.

By now, everybody should realize the energy that the G7 meetings have on the markets. At the most recent meeting, the G7 toughened its position on, calling for exchange rate flexibility specifically in the Asian giant. This is eerily reminiscent of this 2003 meeting . If you recall, back in 2003, the G7 finance ministers called for ”more flexibility in exchange rates.” At that moment, the shift to the statement was the first significant movement by the committee in 3 decades. Over the next four weeks, we saw the dollar slide 13 percent against the Euro, 7 percent against the Japanese Yen and 14 percent against the British pound. To put this into perspective, we evaluate how much each currency has proceeded over the past three weeks because the most recent G7 meeting to how much it moved following the 2003 meeting. We can realize that the EUR/USD, GBP/USD and AUD/USD have room to rally while USD/JPY has sold off by approximately the exact same volume. The table tells us that the long-term impact was much more substantial than the market's knee jerk reaction, which is the risk that the market faces. There are two differences between the meeting and the one in 2003. First, the tone was much stricter and the fees were direct in the April meeting indiing their significance. The US dollar sold off going into the 2003 assembly while it didn't before the most recent meeting.

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USD/JPY sold off 3 percent more which is the equivalent of 350 pips while the EUR/USD rallied 220 more pips as well as the GBP/USD rallied 515 more pips. So do not underestimate the power that the G7 has on the market and the possible move that can happen from the currency market, particularly because this time round, aside from the G7, there are several other pressures on the dollar that can exacerbate its own slide. Old issues are currently resurfacing and each is much more worrisome than the last.


Old Issues Resurface

Geopolitical Risks

One of the greatest risks facing the US dollar Right Now is geopolitical. Tensions are boiling, causing commodity prices to skyrocket. Oil prices are hovering close to its all time highs above $70 a barrel while gold prices are at 25 year highs. The world fears that the issues defend it and with could escalate into a war with the while that is combating. Has recently claimed that it's”joined the club of nuclear countries” and has threatened to attack. Should this battle ignite, the dollar might endure not just because of the imminent risk, but also because a different war could exacerbate the rise in oil prices and the burgeoning budget deficit. Consumers won't be able to abdomen if a peaceful solution is not to the crisis $ 5 gallon gas, which may be a reality soon.


Fed at conclusion of Tightening Cycle

The Federal Reserve can be nearing the very end of its tightening cycle. The FOMC statement has been gradually toned down with the look of a new word from the May statement that was latest. Should you read this report carefully, the Fed is revealing hesitation by stating that some further policy firming may be required. The word”yet” is what the world is focusing on particularly considering that Fed Chairman Ben Bernanke recently said that the market must not rule out a”dip” in the tightening cycle. With sixteen consecutive rate hikes, the economy is setting its weight. Job growth has been decreasing with non-farm payrolls increasing by anticipated from the month of April while retail revenue growth is also slowing. The next chart is something we published in 2005 indiing the dollar reacts to fluctuations in the Fed cycle. Whenever the Fed varies from one bias to a different (either tightening to neutral or tightening to easing), there is a sharp reaction in the dollar. Today we are currently facing a situation that is similar. The dollar has already started to market off in expectation of a shift, but weakness has been limited because it isn't clear when the Fed is going to be done, just that it is going to come soon. When it does happen however, the dollar could fall even further

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Reserve Diversifiion

Slowly, but surely, book diversifiion continues to benefit the Euro. We noticed a lot of talk about book diversifiion. This season, the United Arab Emirates joined the group by shing 10 percent of their reserves from dollars to euros while Qatar's central bank has stated that up to 40 percent of its reserves could be moved to Euros. Sweden has also declared that they've improved the Euro share of their reserves from 37% to 50 percent while Russia declared that they would let their $61 billion oil finance to invest in bonds issued not only by the usa and Britain, but also by Eurozone nations. Of course, in comparison to many other nations, the UAE, Qatar and Sweden just have a small portfolio of reserves, but with discussion of China still looking past US Treasuries, the Euro must loe itself as one of the primary beneficiaries, even if it simply implies that China will cease accumulating US dollar reserves. Nations own two thirds of the world's US$4 trillion of forex reserves, so their activity is particularly important. China has been looking past the dollar as an investment over the last few months as they assume vulnerability to more tangible resources such as oil fields or gold. If they're made to revalue their currency even farther, their need for US dollars would be even less.


Impacts on additional markets

When the dollar continues to weaken, the impact on other markets could be profound. Even though the stock market is holding strong, its potency may start to waver as foreign investors shy away from dollar denominated investments. Both bond and stock markets could suffer as investors and central banks realize that their yields are being blindsided by the dollar as they lose out when they convert their dollar denominated investments back to their own currencies. For specific stocks, importers will face the biggest decrease while exporters will see the biggest advantage, since their buying power is reduced. However, no market will prevent being affected by the fluctuations in US dollar.


Kathy Lien is the Chief Currency Strategist at Forex Capital Markets. Kathy is responsible for providing research and analysis for DailyFX, including technical and fundamental research reports, market commentaries and trading egies.

A seasoned FX analyst and trader, prior to joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross Markets and Foreign Exchange Trading. Kathy has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot and options. She also has experience trading a number of products outside of FX, including interest rate derivatives, bonds, equities, and futures.

She has a Bachelors degree in Finance from New York University. Kathy has written for Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO Magazine. She's frequently quoted on Bloomberg and Reuters and has taught seminars across the nation. She has also hosted trader chats on EliteTrader, eSignal, and FXStreet, sharing her expertise in both technical and fundamental analysis. https://forexintuitive.com/discussio...r-3-study.html