Is the rally in the US Dollar justified? – Paxforex

The US Dollar has rallied to multi-year highs as forex traders grow more confident that the US Federal Reserve will raise interest rates sooner than previously expected. Expectations now call for an increase in interest rates by September 2015 or three months earlier, but does this warrant the sharp rally witnessed in the US Dollar? In our opinion it does not justify the strength of the rally which means that the US Dollar is expected to revert back to normal as 2014 comes to an end.

Economic data has been mixed at best with existing home sales contracting by 1.8% to 5.05 million units in August. Economists expected a continuation of the 2.4% increase to 5.15 million units reported in July with an increase of 1.0% to 5.20 million units. The housing sector is an important part of the economic health of the US and weakness there often translates into weakness by the US consumer and the US economy as a whole.

Adding further signs of concern came out of the Chicago Federal National Activity Index for August which contracted and showed a reading of -0.21. Economists expected a decrease to 0.33 from July’s 0.39. The preliminary reading for the September Markit Manufacturing PMI missed expectations and was reported at 57.9 for no growth as compares to August. MBA mortgage application dropped 4.1%.

Durable goods orders plunged by 18.2% in August which was a bigger drop than expected. In addition the increase in July was revised lower. Given the heavy reliance on the service sector a weaker reading in the Markit Services PMI for September came in weaker than expected at 58.5 which actually marks a contraction from August where the PMI stood at 59.5. Consumer confidence as measured by the University of Michigan also missed expectations late Friday.

The final revision to the second-quarter GDP shows that personal consumption did not increase which is a troubling sign. There have been plenty of economic reports which do not support monetary easing. The rally in the US Dollar is not justified and has stretched for an excessive amount of time. Going forward the US Dollar is vulnerable to profit taking as forex traders may opt to realize trading profits as economic reports do not support current levels in the US Dollar.

Written by Paxforex