The Dollar’s Recent Surge Is Unusual
The dollar has been soaring lately, and that has affected both the global markets and the U.S. economy.
The moves in the dollar in the last few months are unusually large for a major currency. The Bloomberg U.S. Dollar Index increased 4% since mid-April. The dollar had been trending steadily lower for some time, but the recent rally broke that trend and surprised many analysts and investors.
The euro has suffered consistently during this period. It now is at a six-month low and seems to trade lower almost every day. It declined 5.58% against the dollar over three months.
But the euro isn’t the only currency declining against the dollar. In fact, almost all currencies are suffering. The South Korean won is faring best, because it lost only 0.42% against the dollar over three months.
Relative economic strength is a major factor in the currency changes.
While the U.S. economy is growing more slowly than at the end of 2017 and a lot of economic data is weaker than expected, conditions are worse elsewhere. Europe, in particular, is reporting weaker data. The Purchasing Manager Indexes across Europe have tumbled in 2018. The Citigroup Economic Surprises Index for Europe is at one of its lowest levels ever, indicating reported economic data is far below expectations.
Higher U.S. interest rates also are a factor. They attract investors to dollar-based assets, causing a sell-off in other assets and currencies. The interaction between higher rates and a stronger dollar can be self-reinforcing. Higher rates attract investors to dollar-based assets. That causes non-dollar currencies and assets to decline. More investors sell those non-dollar assets to invest in the dollar, which increases the dollar’s value more and causes the cycle to continue.
Economic growth and interest rates aren’t the only factors affecting currencies.
Turkey has a well-reported series of political and economic policy problems that are causing investors to flee the country. The Turkish lira is down almost 20% to the dollar over three months.
Brazil has political corruption issues. There also is a widespread truckers’ strike, and proposals to reform the economy are stalled. The current polls also indicate that in the election this fall, the populist candidate might defeat the incumbent, who is popular with investors. The Brazilian real is down almost 12% against the dollar over three months.
Argentina’s economic problems are so extreme it asked the International Monetary Fund to help it with a bailout package. The Argentine peso is down almost 18% against the dollar over three months.
One anomaly of the recent dollar rally is that commodities have been increasing in dollar terms at the same time. Usually, commodity prices decline when the dollar is rising, and vice versa.
No doubt the currency moves also are influenced by the trade conflicts playing out in the media and the on-again, off-again meeting between North Korea and the United States. But the major causes are economic and political uncertainty. The dollar trend is likely to continue until investors decide there is less uncertainty or the uncertainty is priced into the markets.
The Data
The Federal Reserve regional bank surveys and other data indicate manufacturing is surging again.
The Kansas City Fed Manufacturing Index came in at 29, up from 26. This is the highest level in years. The Dallas Fed Manufacturing Survey rose to 26.8 from 21.8.
The Chicago Purchasing Managers Index recovered to 62.7 after several months of weakness. It still is below the highs of December 2017 and January 2018, but it is close to them.
The headline for Durable Goods Orders was a 1.7% decline, compared to a 2.7% increase last month. But when the transportation sector is excluded, orders increased 0.9%. In addition, core capital goods increased 1.0%. This indicates a strong increase in business investment.
Housing continues its uneven growth. The FHFA House Price Index rose only 0.1% in the last month, compared to 0.8% for the prior month. That puts the 12-month growth rate at 6.7%, compared to 7.4% last month.
The S&P Corelogic Case-Shiller House Price Index (which lags the other housing indexes by a month) increased 0.5%, compared to 0.8% the previous month. The 12-month increase in prices was 6.8%, which is unchanged from last month.
Existing home sales declined 2.5% for the month, compared to a 1.1% increase last month. Over the last 12 months, sales declined 1.4%, compared to a 1.2% dip last month. The median price rose 3.2% over the month.
Likewise, the Pending Home Sales Index from the National Association of Realtors (NAR) declined 1.3%, compared to a 0.6% increase last month. It now is down 2.1% over 12 months.
Personal income increased 0.3% in the last month, though last month’s increase was revised down to 0.2% from 0.3%. But consumer spending increased 0.6%, and last month’s spending was revised higher to 0.5% from 0.4%.
Inflation, as measured by the Fed’s preferred PCE Price Index, also increased a bit. It rose 0.2% for the last month and 2.0% for the last 12 months. The core PCE Price Index also increased 0.2% for the month but only 1.8% over 12 months. Part of the increase in spending and inflation was due to higher gas prices, but after excluding gas prices, both measures still had strong increases.
Consumer Sentiment, as measured by the University of Michigan, declined to 98.0 from 98.8. That’s still near the highs of the recovery.
Consumer Confidence, as measured by The Conference Board, also declined to 128.0 from 128.7. That’s the 11th consecutive month above 120. Streaks consistently above 120 have been reported in the 50-year history of the measure.
The second estimate of gross domestic product (GDP) for the first quarter essentially was unchanged, coming in at 2.2%, compared to 2.3% for the first estimate. The GDP Price Index, a measure of inflation, was revised down to 1.9% from 2.0%.
Tomorrow’s Employment Situation reports might come in weaker than in recent months, based on the labor market reports leading up to it. New unemployment claims increased 11,000 last week and the same amount the week before. But they declined 13,000 in the latest week. The weekly number and all the longer-term averages are at or near historic lows.
The ADP Employment Report found that 178,000 new private sector jobs were created in the last month, compared to 204,000 reported last month. Also, last month’s report was revised down to 163,000 new jobs created.
The Markets
The S&P 500 lost 0.27% for the week ended with Wednesday’s close. The Dow Jones Industrial Average dropped 0.78%. The Russell 2000 returned 1.30%. The All-Country World Index declined 0.89%. Emerging market equities dropped 1.68%.
Long-term treasuries increased 2.95% for the week. Investment-grade bonds gained 0.71%. Treasury Inflation-Protected Securities (TIPS) returned 0.66%. High-yield bonds lost 0.22%.
The dollar increased 0.28%.
Energy-based commodities declined 1.93% for the week. Broader-based commodities lost 0.90%. Gold rose 0.64%.
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