USD Poised for Reversal

USD Poised for Reversal

All eyes in the financial market now turn to Biden‘s $2 trillion infrastructure plan in the wake of the approval to his $1.9 trillion stimulus package. House Speaker Pelosi said during a visit that, she hoped for Biden’s launch of the infrastructure plan and the approval from Congress to it over the next few months. However, she did not make it clear whether they would raise taxes to fund the infrastructure bill. From my standpoint, I believe significant tax increases from the Department of the Treasury will be inevitable to back the two plans. Such a tax hike might bring about both positive and negative impacts on the US stocks and economy. But as far as the dollar is concerned, the benefits gained might outweigh the disadvantages because the country could reduce deficits with its aid.To get more news about WikiFX, you can visit wikifx.com official website.

  Besides the tax increase, the upcoming plans will also weigh on the Departments bond issues. Under such pressures, the 10-Year Treasury Yields may spike at expense of its prices. Moreover, the launch of the infrastructure project could ratchet up the prices of raw materials, such as copper, aluminum, and iron ore, jolting commodities upwards. As a result, bond yields could find an easy way to climb higher since inflation will have gathered pace, sending a reversal, rather than a dead cat bounce, to the dollar. The European Central Bank (ECB) will speed up the pace of bond buying in the second quarter of the year to stave off the adverse effect of the rising Treasury yields, said its chief Christine Lagarde last Thursday following the ECB‘s policy meeting. It’s the second central bank after the Reserve Bank of Australia in response to the growing bond yields. The acceleration will hamper the euro and slow down, or even take out, gains in the 10-Year Government Bond Yields for the Euro Area. Thereafter, the yield spread between the bonds in the US and Europe will further widen, punishing the euro but propelling the DXY to new highs.

  The current situation is favorable to the dollar with potential risk lying ahead. If Powell changes his mind and announces the launch of Operation Twist (sell near-term Treasuries to buy longer-dated ones) on this Wednesday‘s (March 17) Fed rate meeting, chances are the country’s bond yields will shrink and the dollar will return to weak. But I don‘t expect him to do so considering the role the bond yields play in the economy over the recent few months. The US stocks didn’t go into a tailspin in the face of the rising bond yields. While the Nasdaq index received some correction, the Dow Jones index registered fresh highs in a row. All these indicate that there is no pressure, nor need, for the Fed to take action. Only when the opposite holds true - the economic indicators turn sour and the Wall Street equity indices all plummet - will the Fed bail out the market. Generally speaking, the dollar will endure its bull cycle in future trading.