US dollar: Greenback back on track

The US dollar index, which tracks the greenback’s progress against a basket of major trading partners’ currencies, hit a 12-year high in March before falling back.

746-USD

The dollar had "an extended wobble" this spring, says Robin Wigglesworth in the Financial Times. The US dollar index, which tracks the greenback's progress against a basket of major trading partners' currencies, hit a 12-year high in March before falling back.

But in the past few days it has found its feet again, and the rally looks set to continue. The main reason to think so is the improving macroeconomic backdrop. Investors are increasingly confident that the world's biggest economy, accounting for 23% of global GDP, has "emerged from its first-quarter lull", says Moody's Ryan Sweet.

In May, 280,000 new jobs were created, the strongest monthly tally in half a year. The payroll figures for the previous two months were revised higher, while another 400,000 people entered the labour force, reflecting growing optimism. Annual wage growth hit 2.3%, a two-year high. Other data for May, notably car sales, also look encouraging. Consumption, which comprises around 70% of GDP growth, has been lacklustre of late, but should strengthen as falling oil prices boost spending power, says The Economist.

Shoppers appear to have banked the recent windfall from cheaper fuel.But now not only does it cost less to fillup a car, but inflation is fading for goods such as food, which are expensive to transport and thus affected by energy prices. "As the benefit of cheaper oil feeds through the supply chain, the increase in income may seem more permanent, and so spur spending."

The upshot, says Socit Gnrale'sKit Juckes, is that the US data now look sufficiently strong to persuade investors that interest rates will finally begin to rise in September. That implies higher yields on US assets, making the dollar more attractive. Meanwhile, central banks in the eurozone and Japan are still printing money. They will both keep doing so, well into next year, while the Bank of Japan has said it might print even more.

In other words, it will be a very long time before interest rates rise in either region. And ongoing quantitative easing also tends to weaken a currency. As a result, the US dollar, backed by a strengthening economy, looks very appealing compared to either the euro or the Japanese yen. Deutsche Bank expects the dollar, now at around $1.12 to the euro, to climb "at least [to] parity" by the end of the year.

Recommended

Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Of course bitcoin is a bubble – a bubble you can’t ignore
Bitcoin

Of course bitcoin is a bubble – a bubble you can’t ignore

Bitcoin’s wild ride is being called a bubble by many. And it is, says Dominic Frisby. But that’s not necessarily a bad thing. And it’s a bubble in whi…
13 Jan 2021
The price of this commodity has almost doubled since the start of the year
Gas

The price of this commodity has almost doubled since the start of the year

Liquefied natural gas (LNG) is fetching record prices in Asia, almost doubling in the last two weeks alone. John Stepek explains why this is so import…
12 Jan 2021
The charts that matter: the dollar bounces, bitcoin soars, Tesla roars
Global Economy

The charts that matter: the dollar bounces, bitcoin soars, Tesla roars

As bitcoin and Tesla go stratospheric and the US dollar rebounds, John Stepek looks at the charts that matter most to the global economy.
9 Jan 2021

Most Popular

A simple way to profit from the next big trend change in the markets
Investment strategy

A simple way to profit from the next big trend change in the markets

Change is coming to the markets as the tech-stock bull market of the 2010s is replaced by a new cycle of rising commodity prices. John Stepek explains…
14 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Here’s why markets have shrugged off the US political turmoil
Investment strategy

Here’s why markets have shrugged off the US political turmoil

Despite all the current political shenanigans in the US, markets couldn’t seem to care less. John Stepek explains why, and what it means for your mone…
7 Jan 2021
Free 6 issue trial then continue to