The reverse beauty pageant continues, Custom House, A Western Union Company says. With economic weakness and political uncertainty weighing on the Euro, the Sterling, and the Yen, the US dollar has emerged as one of the strongest major currencies over the last few months, not by dint of extraordinarily strong economic performance, but simply because other trading blocs are in even uglier condition.
Revised fourth quarter 2009 GDP growth came in at 5.6%, marking the American economy’s fastest expansion in six years. At this stage in the economic cycle, inventory replenishment often drives short-term gains, which erode as time passes, but fears of a “double dip” are passing, and expectations are shifting towards an earlier return to normalized monetary policy. At the same time, unprecedented levels of debt issuance are flooding the financial markets, adding to pressure on short-term yields. Treasury auctions in late March held some of the first indications that supply is beginning to outpace demand, and short yields rose sharply. The bond vigilantes are on their way back.
As yields rise domestically and investment prospects brighten, the United States is attracting capital flows at the expense of the United Kingdom, the European Union, and Japan. As this process occurs, the US dollar’s long-standing secular decline has been temporarily halted, and the currency has gained almost 10% on a trade weighted basis since December.
With residential property prices spiraling downwards once again, consumer deleveraging continuing, and unemployment at stubbornly high levels, the revival of the economy is far from being assured. Clouds remain over the recovery’s sustainability through the remainder of 2010, and a number of prominent economists expect GDP growth to slow towards 3.5% on an annualized basis. This implies that rapid monetary tightening remains unlikely, although the Federal Reserve will almost certainly take measures to trim the balance sheet and reduce monetary excess.
As the world economy attempts to wean itself off government stimulus spending and cheap liquidity over the next six months, volatility is expected to rise, meaning that the US dollar’s recent strength cannot be depended upon. Ultimately, the US dollar’s direction will be largely predicated on external factors: the resolution of fiscal difficulties in the European Union, the results of the British election, and the pace of global economic growth. That being said, it appears that the US will continue to outpace its less flexible rivals, and the currency may also see occasional gains as the traditional “flight to safety” mechanism when episodes of fear afflict the worldwide financial markets.
Over the month ahead, the USD’s rally is expected to slow as political risks come closer to resolution in the United Kingdom and Europe. Traders will be reading economic releases very carefully in order to gauge the strength of consumer spending, and will be watching for tightening signals from the Federal Reserve. Overall, corporate hedgers looking to buy US dollars should have plenty of opportunities to trade into the markets during bouts of economic optimism, while those looking to sell should find the environment much improved relative to a few months ago.
United States:
02 APRIL: MARKETS CLOSED
02 APRIL: EMPLOYMENT REPORT, MARCH
06 APRIL: FEDERAL OPEN MARKET COMMITTEE MINUTES, MARCH
09 APRIL: WHOLESALE TRADE, FEBRUARY
13 APRIL: GOODS AND SERVICES TRADE BALANCE, FEBRUARY
14 APRIL: CONSUMER PRICE INDEX, MARCH
14 APRIL: BEIGE BOOK FEDERAL RESERVE SURVEY
16 APRIL: UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX, EARLY APRIL
23 APRIL: NEW HOME SALES, MARCH
27 APRIL: CASE SHILLER HOME PRICE INDEX
27 APRIL: CONFERENCE BOARD CONSUMER CONFIDENCE INDEX, APRIL
28 APRIL: FEDERAL OPEN MARKET COMMITTEE POLICY ANNOUNCEMENT
30 APRIL: Q1 REAL GDP
30 APRIL: UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX, LATE APRIL
Custom House, A Western Union Company
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