It’s been a better week for the US dollar against the other major currencies. After a rocky start against the Euro that saw the dollar fall to €0.7302 it rallied well and climbed steadily for the rest of the period, ending at €0.736. That’s a modest gain but since Tuesday the trend has been in the right direction for importers and currency investors. A generally improved position led to a four-day rise on Bloomberg’s dollar spot index, the longest sustained climb since May. Overall the dollar climbed against 13 out of 16 major global currencies.
The main driver behind the dollar’s rise looks to be the recent labor market figures. These were better than expected, showing that June continued the five-month trend of falling unemployment. Yet again more than 200,000 new jobs were created through the month, making more than 1.4 million since the start of the year, and that’s quickened speculation that the Federal Reserve may bring forward its long-anticipated interest rate rise. Goldman Sachs believe that the lackluster recovery is now accelerating, and if the Fed share that view a rate increase is a real possibility. The release of their last Open Market Committee meeting later this week should give some clues about their thinking, and that could sustain the dollar’s rise. There’s a widespread feeling among analysts, both at home and abroad, that the American economy has weathered the crisis and is set for expansion; a positive outlook usually leads to rate rises.
There are dissenters from that view, including the International Monetary Fund. Director Christine Lagarde has just revised the IMF’s expansion forecasts downwards to account for continuing weak investment and she believes there are still risks for the USA, but at this point her opinion is a minority one.
With a recovering economy and falling unemployment it’s to be hoped that consumer confidence will start to return and Americans will spend more; so far this has been a bad year for the retail sector. A strengthening dollar will make imports more affordable and that could nudge sales upwards in the third and fourth quarters, which would be a very welcome development. Auto sales are already healthy but again cheaper imports could tempt in more middle and high end buyers.
There’s been a downward movement on US Treasuries this week, partly fueled by Russia deciding to reduce its holdings by up to 20 percent as part of its response to international sanctions. A new batch of 10-year bonds will be auctioned off this Wednesday and it will be interesting to see how healthy demand is after the Russian move. The Kremlin’s aims are openly political – they want to reduce the dollar’s dominance in international transactions – but it’s unclear how the markets will take that. A positive response to Wednesday’s offering would indicate a solid endorsement of the US economy and a blow for Putin.
Overall it’s been an encouraging week for the USA, with some real signs of growth now starting to emerge from a previously uninspiring landscape. Let’s hope it continues.