The US dollar is the global reserve currency, and serves as a benchmark for pricing a range of assets such as commodities. Based on a recent survey by the Bank for International Settlements, more than 40% of all currency trading involves the US dollar, thus the performance of the currency is watched closely around the world.
The US dollar is currently steady against all major currencies. Yesterday, the US dollar index (a broad measure of the currency) ended the day slightly lower after making four consecutive higher-highs earlier this week. While the buck was much weaker at the outset of the day, buyers pushed up the currency during New York trading hours. Today's US dollar index trading range remains 95.50 - 97.0.
There are no fundamentals developments driving the dollar today. After most major financial assets entered overbought or oversold conditions earlier this week, currency markets are adjusting accordingly. Looking at the US dollar, there may be an opportunity to go long the currency if the buck falls towards the low-end of its trading range in the near future.
Turning to economic data, initial jobless claims continued decelerating this week. This is a positive development for the US economy, and suggests that the labor market continues to fire on all cylinders. Given the Federal Reserve's mandate to maintain full employment, the health of the labor market is watched closely by the Fed. As all (backwards-looking) economic data points to accelerating growth and inflation, the Fed is more likely to continue raising rates. In turn, this helps the buck. Our outlook on the dollar remains bullish.
|August 14||Export Prices YoY JUL||4.3%||5.3%|
|August 14||Import Prices YoY JUL||4.8%||4.7%|
|August 15||Retail Sales YoY JUL||6.4%||6.1%|
|August 15||Capacity Utilization JUL||78.1%||78.1%|
|August 15||Industrial Production YoY JUL||4.2%||4%|
|August 15||Manufacturing Production YoY JUL||2.8%||2.3%|
|August 15||Business Inventories MoM JUN||0.1%||0.3%|
|August 16||Building Permits JUL||1.311M||1.292M|
|August 16||Housing Starts JUL||1.168M||1.158M|
|August 16||Initial Jobless Claims 11/AUG||212K||214K|
|August 17||Michigan Consumer Sentiment Prel AUG||97.9|
Policy: While the US Federal Reserve remains on a hiking path and recently passed tax cuts should improve inflation expectations, the US dollar remains weak. While most currencies are highly sensitive to changes in domestic policy, the US dollar is unique as it is a global reserve currency. By definition, a global reserve currency is a liability currency, meaning that is borrowed heavily in international lending markets. As most cross-border lending is conducted in USD, strong global growth leads to an acceleration of US dollar loans chasing international investment opportunities. This phenomenon has weakened the currency in recent history. The dollar is thus countercyclical by nature, as it weakens when ex-US growth is strong, and strengthens during global downturns.
Sentiment: Looking at recent Commitments of Traders reports and technical indicators, speculator sentiment towards the US dollar remains firmly bearish. When positioning becomes too extreme, the dollar is more likely to experience relief rallies. As global economic conditions remain benign, as we have described above, it is still too early to suggest that we are on the cusp of a longer term US dollar bull market. While the dollar will continue to enjoy small rebounds when bearish sentiment becomes too extreme, the dollar's longer term trajectory remains bearish.
Economic data: The US economy turned a corner in late 2016, and has since delivered accelerating rates of annual growth. From its lows in Q3 2016, year-on-year economic growth has accelerated in rate of change of terms. Looking at forward-looking indicators such as survey data, sentiment and industrial production all suggest a continuation of the current expansion. Despite rising crude oil prices, inflation and inflation expectations remain fairly subdued. Unless crude oil prices rise sharply in 2018, we expect inflation to resume weakening later this year.
In our last commentary on the US dollar, we wrote that the buck was set to move higher given underlying economic trends. Specifically, US growth and inflation was likely to keep accelerating, while the opposite was likely to happen in most major regions outside the United States. Following the publication of our last commentary, the US dollar index has strengthened from around 91.80 to around...
In our previous commentary on the US dollar, we warned that a weak dollar was hiding significant risks in growth-sensitive assets such as equities and European currencies. As the world’s reserve currency, the buck is inversely correlated to most financial assets because most cross-border lending is conducted in dollars. Thanks to a slowdown in economic growth outside the United States coupled wit…
In our previous take on the US dollar in early February, we wrote that the currency was set to remain weak. At the time, ex-US growth was accelerating, while speculator sentiment was only mildly bearish. While dollar bulls have argued that rate hikes should help the currency, we wrote that expectations for monetary tightening were rising around the world, limiting the impact from the Fed’s action…