US Dollar Articles

US Economy Wakes Up from Hibernation

By Smart Currency May 14th, 2014

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US Outlook – May/June 2014

 

Summary

 

The US economy had thus far been hibernating this year. Adverse winter conditions significantly hampered productivity, leading to a report towards the end of April that US Gross Domestic Product (GDP), and indicator of economic growth, had increased by a mere 0.1% in the first quarter of 2014. The weakest gain in three years, this is all the more paltry when compared to 2.6% growth in the fourth quarter of 2013. As such, the US dollar’s fate was mixed throughout the month, with the US currency ending the month by plummeting to its lowest levels against sterling since August 2009.

The biggest surprise came in the form of labour market figures, with the overall unemployment rate plummeting to 6.3%, a great difference from an expected 6.8%. Non-farm employment change data was also better than expected, demonstrating the biggest workforce increase since January 2012.

 

Work Cut Out for Yellen

 

Federal Reserve Chair Janet Yellen has still got her work cut out, trying to mend an economy that is only beginning to thaw out. As improving unemployment levels forms part of her professional manifesto, the central bank faces the mammoth task of keeping up the improvement in unemployment, as well as keeping economic growth in check, while continuing with its quantitative easing schedule – which has involved reducing its quantitative easing programme by $10 billion per month since December 2013. The programme was projected to finish by the end of 2014, but this month’s obstacles may make that a challenging goal.

At the time of writing (9th May 2014), mid-market rates were at $1/£0.5952 and $1/€0.72407.

 

US – Forecast

 

The US dollar seems to have very few friends at the moment, having performed woefully over the last few months against a wide range of major currencies. It is difficult to see this changing any time soon. The safe haven status of the US dollar traditionally saw it strengthen when there were upsets and worries about the world economy, and weaken in times of world economic growth. Changing times saw the safe haven status accentuated, with US dollar strengthening, especially against sterling.

With the US and world economies now in recovery – a slow process – it is difficult to assess if the recent weakness is due to confidence in the world’s economic recovery and its sustainability; or due to worries about the US economy, the reduction and ultimate withdrawal of quantitative easing; and the possibility of interest rate increases sooner than originally forecast.

We are taking a cautious view in our forecasts, as the US dollar is clearly under pressure, but there is a key resistance level around the 1.70 level, which will require some effort to break through.

 

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