With so many events in play, the dollar has not been able to move higher despite the optimism given by the US Fed about the booming US economy in July’16 FOMC meeting.
The American economy is trying hard to put its best foot forward with the recently released economic indicators. But for some reason its national currency is trending in a totally opposite direction, a fact which has kept many investors in a mind-boggling situation. After trading at an average level of 99.49 in the initial trading days of Jan’16, dollar has moved down to 97.26 levels while writing which means weakness of more than 1 per cent. This unusual trend coming from an index currency which is followed by majority of the market watchers.
As depicted in the chart, the dollar index plunged the most in March’16. The reason could be attributed to the change in stance of the US Federal Reserve that left the markets guessing about the economic state of America.
The Federal Open Market Committee on March 16, 2016 decided to leave the federal funds target range unchanged citing unhealthy global economic and financial developments which were hampering America’s economy. This prompted the committee to cut its projection for the number of rate hikes in 2016 from four to two. Markets reacted negatively which prompted them to park their funds in other assets instead of dollar.
However, the index tried recovering not entirely but some of its previous month’s losses in May’16. Solid economic fundamentals of the world’s largest economy prompted the FOMC committee to once again change their stance to a more hawkish tone. The committee was optimistic of the fading issues of the global economy and other financial developments minus some issues like Brexit and unexpected developments in the Chinese exchange. Furthermore, critical event like the EU referendum showed the win of ‘leave’ camp by 51.9 per cent which boosted the demand for dollar given its safe-haven properties. However, the strength was only meager and not what ideally it should have been.
Regardless of how the dollar is performing, the economic fundamentals of America show a pretty optimistic picture. The three important pillars of the US i.e. employment sector, inflation and growth are showing signs of revival.
As per the recent non farm payrolls and ADP job report people are getting employed however, wage growth is still lacking luster which is a major cause of concern. Large numbers of people are still working on a part time basis as opposed to full-time employment. However, it is better to have low earnings than no earnings. In spite of having less disposable income in hand, consumers are spending their money which is giving a boost to other sectors of the economy.
Retail sales have improved thereby benefitting the manufacturing sector. Industrial production and other factory activity indicators also showed some strength. Housing sectors has improved as consumers are buying newly constructed houses along with the existing ones. Due to all the above promising factors, Q2 GDP growth has improved along with the inflation rate, although, it still lingers far below the Fed’s target level of 2 percent. Moreover, smaller-than-expected trade deficits for both Mar-Apr’16 have also helped in pushing up the economy’s growth rate.
The last one week, starting from July 20, 2016 to July 27, 2016, has witnessed a number of robust economic datasets from the nation like consumer confidence, unemployment claims, existing home sales and new home sales data. In spite of this, the dollar is trending lower. The reason could be mostly attributed to the Brexit aftershocks along with the PBoC policy and Japanese whispers about helicopter money. Not forgetting the on-off news about the US Presidential elections.
With so many events in play, the dollar has not been able to move higher despite the optimism given by the US Fed about the booming US economy in July’16 FOMC meeting. This will be a wait and watch situation unless all the events unfold and give a clear direction about the path of the global economy. The months ahead will see volatility across all the asset class including the dollar.
(The author is associate director, commodities & currencies business, equity research & advisory at Angel Broking)