
Many traders when they start out looking at global macro trading find the USD hard to comprehend. Why? It has different drivers at different times and that can make it a hard currency to feel confident with. However, once you are aware of the drivers it goes from being this bizarre currency to a currency that is being pushed and pulled by different factors at different times. The Financial Source has put together a good break down of the factors driving the USD. They are shortened and summarised as follows:
1. Global risk & Reflation
As a safe haven, the USD has inflows when markets are really scared. (Think March 2020). Market focus now on global synchronised recovery and reflation environment (both usually USD negative). See here for an explanation of what the reflation trade is.
2. Fed policy
The Fed has loose monetary policy and on paper at least see no rate hikes until 2024. However, the US10 Y have been rising, growth prospects have been improving with a string of good data, and the dot plot has seen that some Fed members are starting to see normalisation (sooner rate hikes – though the majority position is still seeing no hikes until 2024).
3. Other Factors
Medium-term bias for the USD remains bearish, but USD strength at the start of the year was mean reversion. The USD going into year-end was the second-largest oversubscribed position in global macro trading.
Balancing these factors help understand the USD. The tricky part is that the market focuses on different aspects of the above at different times, so being tuned in day to day helps you spot the shift more easily.