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    Half-year review: Dollar rally stalls; euro resilient as Asian majors fall

    The US dollar gave up some of its gains in the second quarter of the year after rising sharply in the first quarter. The dollar index, which measures the average value of the dollar against a basket of currencies, had risen by around 10% on rising expectations that the Fed would raise interest rates in the first half of the year. But the greenback lost momentum after the Fed removed the word “patient” from its FOMC statement in March. Although this implied that the Fed was ready to act should they assess that the right conditions had been met, it also increased speculation on the possible timing of a rate rise due to the Fed’s emphasis on data-dependency, meaning markets had no signal for a firm timeline.

    US GDP contracted by -0.2% in the first quarter, mainly due to transitory factors. With unemployment expected to have fallen to 5.4% in June from 5.7% at the start of the year, growth is forecast to pick up in the second quarter. Annual inflation turned negative in the first half but the monthly rise in May is pointing to positive inflation returning in June.

    The greenback was up by 7.5% against the euro in the first six months of 2015, and up by 1.7% against the yen. It also made strong gains against the aussie and the kiwi of 5.3% and 12.7% respectively.

    While the US Fed debates when to raise rates, the European Central Bank embarked on its own quantitative easing program in March after months of speculation. The euro plummeted in the run up to the announcement by the ECB. Aside from the dollar, the single currency also fell against the yen (-5.9%) and against sterling (-8.5%).

    The ongoing Greek crisis put additional pressure on the euro. Starting with the Greek elections in January where the anti-austerity Syriza party won the most seats and the subsequent efforts and failures of the new government for a successful renegotiation of the bailout conditions, the euro has resisted pressure for further falls. One factor supporting the euro had been the record low yields of Eurozone government bonds such as Germany, though this has now subsided. Another has been stronger-than-expected recovery in Eurozone growth and the ECB’s success in beating deflation.

    The pound has been one of the stronger performing currencies in 2015 as UK growth remains robust, unemployment continues to fall and consumer spending has picked up substantially. The pound rose significantly against the euro (8.5%) in the first half of the year, though its gains against the dollar were more modest (1.1%). The general election in May had caused a lot of uncertainty as most polls were suggesting a hung parliament but the decisive victory by the Conservatives boosted both the pound and London stocks. With pay growth and inflation expected to strengthen in the coming months, sterling should see further gains ahead of an expected rate rise by the Bank of England in the first half of 2016.

    Japanese exporters were given a big boost by the weak yen, which continued to soften against the dollar in the second quarter. Japan’s GDP grew strongly in the first quarter but core inflation is still hovering around 0% and investors doubt whether it would rise quickly enough to within the Bank of Japan’s 2% target by 2016. However, unexpected developments such as a worsening crisis in Greece and a persistent slowdown in China could force the Bank of Japan to expand its quantitative easing program further later in the year.

    The Australian and New Zealand dollars both had a volatile first half as fluctuations in commodity prices impacted the aussie and kiwi. The aussie fell 5.2% against the US dollar as the combination of a collapse in iron ore prices and two quarter point rate cuts, as well as speculation of further rate cuts by the Reserve Bank of Australia weighed heavily on the currency. Despite the downside risks, the Australian economy grew by a respectable 0.9% q/q in the first quarter.

    The New Zealand economy faced similar concerns as the fall in dairy prices put a dent on first quarter growth, which slowed sharply to 0.2% q/q. The Reserve Bank of New Zealand joined the RBA in calling for a weaker exchange rate and cut its overnight cash rate in June by a quarter of a point. Markets are now anticipating further rate cuts by the RBNZ as inflation dropped further away from the Bank’s target in the first quarter.

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