US Dollar Analysis - Part 1

Some factors contributing to the strength of the US dollar are:

1. Greece repayments which is keeping pressure on the EURO.
2. Interest Rate scenario in the US. FED is expected to increase interest rates soon.
3. An overall improvement in the US economy since last year.
4. Interest rate scenario in Euro zone and in England.
5. USDX Analysis (US Dollar Index)

Greece is expected to make the next payment in June, which Greece is already refusing to pay. This keeps pressure on the Euro. Currently the Euro made a low of 1.0418 against the dollar in the month of Mar 2015. Due to the Greece situation the Euro is likely to lose strength once again, though I doubt it will make a new low. I would expect Euro to make a low of about 1.0480 or higher and then reverse. However markets have a tendency to take one by surprise and one cant rule out a new low.

Interest Rate Scenario in the US is likely to change as the FED has indicated it will resort to raising interest rates. However for now, OIL prices are low, and the US economy is better but downward pressures still persist. In anticipation of rising interest rates the market has already moved in favor of the US Dollar. I therefore believe that when the FED actually starts hiking interest rates. the US dollar will actually weaken. Traditionally a rule of thumb on the US interest rate hikes is that if the FED hikes interest rates 3 times in a row, the US economy actually enters a recession. 

US economy has improved over the last two years but the recovery is still fragile. Any shock or disturbance could push the economy back again. 

Euro zone is unlikely to hike interest rates for some time. UK has got a full majority government which bodes well for the UK economy but implementing programs to boost the economy will take time and till then the Economy will remain weak. Like the Euro we can expect the Pound to weaken further though the Pound is in a better position then the Euro. I would expect a low of 1.5150 at the most for the Pound.

I would also like to mention the YEN here. I expect at the most 123.80 on the top side for YEN. I don't expect YEN to weaken any further. The Japanese economy has been showing some signs of improvement. The Japanese Economy is expected to continue its strength into the next year. The Japanese Yen is already too weak and a weaker YEN will not make anyone happy. 

US Dollar Index: I expect the US dollar index to test its previous high of 100.32. It might actually make new high. If that happens one can expect all other counters to make new lows.

Summary: To summarize i expect Dollar Strength to continue further to around the third quarter of this year. By the end of the year the trend will reverse. I find the USD looking for a top which means that all other counters should be reversing around the end of the year. 

WTI Crude and USDX

WTI Crude

WTI Crude Oil - US dollar Index

WTI Crude & USDX

Crude has been a topic of discussion for some time with many countries particularly Oil producing ones feeling the pain of the low price. If Crude stays at around 40 levels till the end of the year or more, it could result in serious trouble for Russia, Iran, and a few others. Most analysis has been with reference to Saudi wanting to take on Russia in the Oil Market and Iran which wants to be the regional power in the Middle East which is not to the liking of the Saudis.

The problem with Crude staying at low prices upsets the budget of most oil producing countries which need crude to be at around 80 plus USD to be able to balance their budgets. Current prices would make huge holes in their budget leaving them with big deficits.

I feel Saudi and US are being unfairly targeted because markets drive prices. Since 2008 Crude has made an attempt to move back to 120 plus USD region but failed. At some point profit taking was likely to happen.

Saudis would not like to keep the prices at these or lower levels for long, so is the case also with the US. US is comfortable for the next few months due to storing oil and gas, but US itself needs oil prices to be above 50 USD to support its Shale gas and oil Industry which eventually will get effected if prices stay at these prices.

There is also another line of thought which believes the Saudis are squeezing out competition including the US Shale Oil and Gas companies.

Whatever the case, the current situation is most serious because if crude stays at these prices till around the end of the year, we could have unwinding of positions on other markets. Oil Producing countries would have to unwind positions in Real Estate and Stocks to meet their spending's. This could lead the stock markets to crash globally.

Have attached Charts of USDX (US Dollar Index and Crude). Maybe we are near the bottom. USDX is in overbought territory as can be seen from the RSI. If the price of 92 in US Dollar Index holds we can see some correction in crude possibly to above 52.