Chart Of The Day: Why U.S. Dollar Will Strengthen, Even After Rate Cut

 | Jul 31, 2019 20:29

If the Fed is going to cut rates, why is the U.S. dollar enjoying its strongest rally in almost three years?

More than 78% percent of traders bet that the Fed will cut its benchmark rate for the first time in a decade by 25 basis points to 2.25. Yet, traders couldn’t get enough of the dollar, pushing it up for nine straight days in its longest rally since the 10-day advance when President Donald Trump took the White House by storm.

So, why is the greenback not plunging in anticipation of the first rate cut since before the Financial Crisis? The first cut after nine increases since December 2015 should logically weigh on the dollar, not boost it so much that the length of its rally competes with that of the so-called Trump Trade.

But of course, a currency trade doesn't take place in a vacuum, as its strength is measured relative to other currencies. And, however dovish the Fed might suddenly be, it still lags well behind other major central banks, both in time and degree.

In a bond market deluged with negative yields, the 10-year Treasury yielding 2% is a godsend, attracting substantial foreign demand, who must buy the dollar first. Europe is hit with weak growth and Brexit uncertainty weighs both on the euro and the pound, which is near a two-and-a-half year low, teetering above the lowest since 1985.

And this is if the Fed does give in to market pressure and President Donald Trump. If it surprises and doesn’t cut, the dollar will soar.

However, before rushing into a dollar position, traders should be aware that the greenback faces substantial resistance.