What is moving U.S. dollar Index Futures

U.S. Dollar Index futures have been an interest trade in the last few years and traders who understand some of the recent market moves have been able to make some big profits.

In the last few weeks the U.S. dollar index has made some significant gains and with renewed fears of another major economic crisis, analysts are expecting the greenback to continue to moving higher in the near-term. At the same time, analysts are also expecting to see more weakness in the euro. Most traders who are active in U.S. dollar futures also pay attention to the Euro because these currencies are weighted heavily against each other. “EUR/USD’s technical picture continues to point towards further weakness ahead,” said Shaun Osborne, Chief FX Strategist, at TD Securities. “We remain bearish in the near-to-medium term.”

To understand why investors are jumping into the U.S. dollar we have to go back a few years. Before 2008, U.S. dollar futures were in a significant decline. Investors had the opinion that the U.S. market was losing some of its impact in the global market more people were ignoring the U.S. and searching for other opportunities in growing developing markets. However, in 2008, housing prices in the U.S. started to drop and banks with exposure to defaulting mortgages started to struggle. The bank with the biggest exposure to these markets was Lehman Brothers, and finally in October of 2008 they were forced into bankruptcy. This move shook the pillars of the entire global marketplace which caused investors to search for the safest investments which happened to be U.S. government bonds. By early 2009 the U.S. dollar futures were trading around 90.00, which was its highest level in more than four years. Despite the massive debt of the U.S., investors and traders believed that in a global recession the U.S. government would be one of the last nations to suffer.

Traders have called the move in the U.S. dollar the “safe-haven trade.” Any time there was an element of fear in the marketplace the U.S. dollar would shoot higher, which is why we saw the rollercoaster markets between 2009 and 2010. In 2010 the U.S. economy managed to pull itself out of the global recession and although markets were relatively skittish, investor confidence started to build. With the growing positive sentiment investors started to pay attention to how much the U.S. government was spending.

In 2011 there was major concern that the U.S. would have difficulty paying all of its bills and there were threats that rating agencies would downgrade the country’s sovereign debt. In April 25 U.S. dollar futures hit its lowest point since 2008. Despite the strong politically rhetoric during the summer, the U.S. government is starting to get control of their debt and it appears just in time. There are fears of a new global economic crisis, this time originating in Europe. Although Germany and France have relatively strong economies, because of the euro, their fate is tied with weaker nations like Greece, Spain, Portugal, Italy and Ireland.

The biggest advantage the U.S. has is that it can raise taxes to generate new revenues if necessary. In Europe countries have to get together and negotiate and eventually work out a deal, which can be extremely complicated and time consuming. If one of these weaker countries defaults on their debt, it will create a domino effect across Europe. In this climate, traders are once again looking at the U.S. dollar. In the last few weeks the U.S. dollar has made some extremely big gains on euro weakness. Over the next few weeks traders will be watching resistance at 80.00 if this level breaks with strong volume, futures could eventually make another run back to 90.00 in the medium term.

In the near-term, traders need to pay attention to the emotions running through the marketplace. The stronger the fear sentiment the better the U.S. dollar will do. “…The EUR/USD likely to remain under pressure and the dollar expected to remain bid amid signs of waning market confidence,” said a recent report by currency strategies at Brown Brothers Harriman. “The EUR/USD, in particular, is expected under pressure across as the combination of a potential Greek default, a shift in ECB posture, divisions between policy makers over how best resolve the ongoing debt crisis and funding worries about European banks continue to rattle markets.”

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