The markets were surprised this week by poor American manufacturing data. The Institute for Supply Management's index of manufacturing activity fell to 48.6 in November, the lowest levelsince the Great Recession ended in 2009. A reading below 50 reflects a contraction in the sector.
Other data were more positive, however. Construction spending rose to an eight-year high; car sales remain on track for a record year; durable goods orders rose by 3% last month; and house-price growth accelerated in September. The US dollar index, measuring the greenback's progress against a basket of major trading partners' currencies, is near April's 12-year high.
What the commentators said
The manufacturing news shouldn't deter the US Federal Reserve from raising interest rates for the first time in almost a decade next month, as ING's James Knightley told the FT. The service sector "dwarfs manufacturing" and is doing well, plenty of jobs are being created and pay is rising. That's good news for consumption, which accounts for 70% of GDP.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
All this suggests the dollar could be set for further gains. Higher interest rates in America boost the yield on US assets, making them more appealing. As for the euro, which makes up around half of the dollar index, expectations of looser monetary policy imply further weakness.
"Not so fast," said The Wall Street Journal's Tommy Stubbington. The outlook may well be priced in by now. Global fund managers polled by Bank of America Merrill Lynch think the dollar bull trade is the markets' most crowded at present, as Buttonwood noted on Economist.com. That suggests little scope for yet more gains and a potentially sharp reversal if sentiment changes. HSBC's Daragh Maher, for instance, thinks the euro won't fall much further before recovering to $1.20 by the end of 2016.
-
A junior ISA could turn your child’s pocket money into thousands of poundsPersuading your child to put their pocket money in a junior ISA might be difficult, but the pennies could quickly grow into pounds – and teach them a valuable lesson about money
-
Cost of Christmas dinner jumps 6.5% as grocery price inflation rises againThe average Christmas dinner for four now costs £32.57 as grocery price inflation increases - but what does it mean for interest rates?
