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Dollar up as US Q2 GDP revised higher by more than expected to 3.7%

US GDP growth for the second quarter was revised higher to 3.7% from 2.3% in the initial estimate. Consensus estimates were for GDP to be revised to 3.2%. The upward revision to second quarter growth comes after first quarter growth was also revised higher to 0.6% back in July, suggesting the US economy has been more resilient in weathering transitory factors and weak global demand than initially anticipated.

According to the US Bureau of Economic Analysis, the improved GDP numbers came from upward revision to exports, non-residential fixed investment, private inventory investment, state and local government spending, and in personal consumption expenditures (PCE). Imports, which are subtracted from GDP, were revised lower.

The PCE price index jumped to 2.2% in the second quarter from -1.9% in the first quarter. Excluding food and energy, the core PCE index rose to 1.8% in the second quarter from an upwardly revised 1.0% in the first quarter. Both measures, which are looked at closely by the Fed, point to an increase in inflationary pressures in the second quarter.

Personal consumption spending accelerated to 3.1% in the second quarter from 1.8% and was higher than initial estimates of 2.9%. July’s personal spending figures are published on Friday and should show consumer spending staying robust into the third quarter.

After months of mixed data on the US economy, recent figures have been increasingly strong with the manufacturing sector also showing signs of picking up, which had been lagging other sectors of the economy. Low inflation has been the Fed’s main concern in holding off monetary tightening but the broadening positive outlook for the US economy will make the Fed’s job more difficult amid ongoing weakness in commodity prices and potential risks from a slowdown in China.

The Fed will not want to destabilize financial markets when there is high volatility and worries over China linger. But by further delaying raising interest rates, it could inadvertently signal a lack of confidence on the strength of the world’s largest economy.

The dollar rose against major currencies after the data as it once again raised expectations of a September rate hike. The greenback jumped to 120.63 against the yen and to 0.9594 against the Swiss franc. The euro extended its losses against the dollar, sliding to 1.1250 dollars in late European trading. The pound briefly dropped below the 1.53 handle but later rebounded to 1.5412 dollars.

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