Where next for the dollar?

Despite poor manufacturing data, the US dollar is closing in on its 12-year high last seen in April.


The dollar is buoyant

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.

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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.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.