The forex market has not been kind to the US dollar recently. Losses have been sustained across the board, and DailyFX.com has even proclaimed the dollar as on the ropes. And there is plenty of data to support that assertion. Retail Sales printed last week at a loss of 0.9% versus an expected gain of 0.2%. That by itself triggered huge concerns in the currency market because of the influence that retail sales has on consumer spending, which is 2/3 of the US economy.
This overall dollar weakness was felt throughout the forex markets. USD/JPY finally saw some real unwinding in the carry trade, further weakened by the decision made by Iran to accept yen in payment for oil. The decision may signal an overall shift away from dollar-dominated international trade. GBP/USD continues to test multi-decade highs, confounding industry “experts,†primarily through the central bank’s hawkish stance on inflation. The commodity currencies continue to kill in the market on the back of high oil and gold prices. Even the euro is threatening record levels, despite the historic unwillingness of the ECB to allow that kind of appreciation.
But investors might be underestimating the resiliency of the US dollar. The recent releases concerning job and wage growth both surprised to the upside, suggesting that the situation surrounding consumer spending might not be as dire as we may think. The New York Fed Factory Index printed this morning at 26.5, surprising a market that was only expected 18. The state of manufacturing nationwide looks pretty rosy and it can only be helped by the weaker US dollar. But that’s still not the main reason that I am still bullish on the greenback.
It’s because of inflation; more specifically, it is because the Fed continues to be worried about inflation. There is a growing movement internationally to focus on headline inflation, instead of core inflation, which is more commonly considered now but excludes energy and some food prices. Oil is still above $70/bbl and according to Bloomberg.com, we might be experiencing the biggest boom in food commodity prices in years. Headline inflation is likely to stay high because of those two factors, and that is likely to keep interest rates up. The only thing the Fed can really control is prices and as long as that is its focus, the dollar will not be lacking in support.
Posted: July 16th, 2007 under Economics, Interest Rates, United States Dollar.
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