U.S. Dollar Resilient against Euro and British Pound
The U.S. may be the biggest economy in the world, and the U.S. dollar may be the world’s reserve currency, but the greenback has been volatile since the start of 2015, trading in a range of $0.93 and $1.00 against a basket of other currencies.
One of the reasons that the U.S. dollar continues to remain so resilient is that the U.S. economy, while fragile, continues to do better than most other economies. To put it into context: in the second quarter, U.S. gross domestic product (GDP) advanced just 1.1%; slightly below modest expectations of 1.2%.1
This continues a trend of weak GDP growth. In the first quarter, GDP rose 0.8% and in the fourth quarter it advanced to 0.9%. Over the last two years, the U.S. economy has really failed to gain any momentum. This puts the entire economy in danger of stalling.
Things are worse in the world’s biggest economic region. European Union (EU) GDP has been stagnant near 0.5% for more than five years.2 Most recently, in July, seasonally adjusted GDP increased 0.3% in the EU19 (euro area) and 0.4% in the EU28. This is a contraction from the first quarter where GDP in the euro area rose 0.6% and 0.5% in the EU28.
This shows even further weakness when compared to 2015. In July 2015, GDP in the euro area rose 1.6% while GDP in the EU28was up 1.8%. In the first quarter of 2015, euro area GDP increased 1.7% and advanced 1.8% in the EU28.
Against this backdrop, the U.S. dollar should remain strong against the Euro and a large number of other currencies.
Is the Greenback Done Until 2017?
While the U.S. dollar may be doing better than other global currencies, it is still under a lot of pressure, and it may not really rebound until early next year. Why? We are in a Central Bank-driven market. Meaning that stocks and currencies thrive or dive depending on what the Federal Reserve says.
By raising its key lending rate, the Fed is saying it believes the U.S. economy is doing well enough to support a rate hike. This is good for the U.S. dollar as it suggests the economy is doing well. If the Federal Reserve keeps its rate near historic lows, this suggests the U.S. economy is not doing as well as expected and puts pressure on the greenback.
Many expect the Fed to keep interest rates pat when it meets next later this month. In addition to weak GDP growth, there are other signs that the U.S. economy is not doing all that well.
The U.S. non-manufacturing purchasing managers’ index reading for August was 51.4, a sharp decline over the reading of 55.5 in July. This is the lowest reading in six years. This is especially unnerving when you consider that analysts were expecting an August reading of 55.5.3
On top of that, U.S. jobs data is underwhelming. In August, just 151,000 jobs were added to the U.S. economy. Analysts were calling for 180,000 jobs to be added. At the same time, wage growth is slowing. The unemployment rate continues to hold under 5.0% but the overall underemployment rate continues to hover near 10.0%.4
The strength of the U.S. dollar will continue to face pressure for the remainder of the year. This opens up a large number of opportunities for investors to profit from. Low interest rates are bullish for precious metals like gold, silver, and platinum. Uncertainty around the near-term strength of the greenback also creates opportunity with Forex trading.
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- “Gross Domestic Product: Second Quarter 2016 (Second Estimate),” Bureau of Economic Analysis, August 26, 2016; https://www.bea.gov/newsreleases/national/gdp/2016/gdp2q16_2nd.htm.
- “Preliminary flash estimate for the second quarter of 2016,” EuroStat, July 29, 2016; https://ec.europa.eu/eurostat/documents/2995521/7572532/2-29072016-CP-EN.pdf/.
- “August 2016 Non-Manufacturing ISM Report On Business,”Institute for Supply Management, September 6, 2016; https://www.instituteforsupplymanagement.org/ismreport/nonmfgrob.cfm.
- “Employment Situation Summary,” Bureau of Labor Statistics, September 2, 2016; https://www.bls.gov/news.release/empsit.nr0.htm.
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