The US dollar is down – but don’t count it out
The US dollar recently suffered its worst bout of weakness against the other major currencies following the much-delayed implementation of the FOMC’s asset purchases reduction plan in December.
New Fed Chair Yellen promises continuity
A batch of very inconsistent data has the market doubting the strength of the US recovery. Will the Fed maintain its course in reducing purchases further? Or will it dwindle?
Well, the new Fed Chair Janet Yellen was out in her first major appearance before the US Congress underlining that her leadership is all about continuity in monetary policy. For the market, this means the Fed will remain firmly dovish and may quickly abandon its intentions to further reduce asset purchases, if the US economic weakness persists. In effect, hiking rates may remain far beyond the horizon.
Could be nothing but the weather
It seems to me that the market has been far too eager to sell the US dollar. I suspect much of the US data weakness is weather-related. Remember, the US has suffered some of the most severe winter weather in generations. Even if the US recovery should begin to weaken slightly, it is still far better positioned than any other major economic region.
US has cheap labour, an energy boom that is rapidly repairing the US current account deficit and affordable housing. And outside of the public realm, it has deleveraged from the crisis.
The USD may stumble for another month or so, but I’m expecting a strong rally to resume against most of the rest of the top-traded currencies.
The chart shows the US dollar versus an evenly-weighted basket of the rest of the G10 currencies. The rally has been rather halting and choppy as the Fed’s monetary policy remains extremely accommodative, even as it has begun the process of slowing the expansion in its balance sheet. Still, I would look for new highs in this measure of the US dollar’s strength in another month or two, and certainly by mid-year.