Inflation fears put the US dollar in the spotlight

By: Miguel A. Rodriguez

14:43, 05 May 2021

The dollar rose sharply on Wednesday, fueled by renewed sentiment about higher interest rates in the United States

A selloff of the Nasdaq technology index added more interest in the greenback as a safe haven.

The sentiment towards interest rate hikes has been underlying the general market sentiment for weeks. Yesterday, Treasury Secretary Janet Yellen said that "interest rate hikes may be needed in the near future." Yellen made this comment in a virtual conference in which she argued for the need to avoid an overheating of the economy. She said that although the additional spending that is taking place is relatively small compared to the size of the economy, it could put more pressure on interest rates. This thought seems to be generalized among prestigious investors such as Warren Buffet, who have already expressed their concern about inflationary spikes.

For the moment, treasury bonds have not reacted significantly to these statements, remaining stable at levels that, in the case of the 10-year bond today, stand at 1.60%. However, short-term interest rate futures already anticipate increases in interest rates from the Fed for next year.

The effect on the stock markets was negative. The most affected was the Nasdaq technology index that broke down and has lost up to 4.5% in recent days.

As we have pointed out in previous analyzes, the technological index had broken a diamond formation that technically anticipates falls in the asset in question.

Although it is still not possible to speak of a change in trend, the correction is still important, and everything will depend on whether or not this feeling of risk aversion will continue in the market, motivated, in this case, by expectations of inflation and hikes of interest rates sooner than the Fed says. The important levels to watch in this index are 13247, where the 100-day SMA line passes, and that would mean a pivot in the price action and below the main support located around 12,400, below which the trend would change from a technical point of view.

The dollar has experienced a strong rise with this new market scenario. The dollar index is still in the last upward trend that started at the beginning of the year, above the trend line that defines it. But still far from the main resistance level located around 93.13, above which there would be the talk of a reversal of the primary downtrend.

 

Sources:  Bloomberg.com, WSJ.com

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