Dollar dented but not depressed


Activity in the US has clearly been overlooked, as the chaos in the Eurozone takes the limelight. 2011 has been one of the more difficult years for macro trading, with the US economy so far managing to avoid heading back into recession.

Early in the month we saw the release of various positive pieces of US economic data from employment to the service sector. Last Friday US non-farm payrolls added 80,000 jobs during October, with a revised 158,000 jobs added in September. The unemployment rate dropped to 9.0 per cent from 9.1 per cent the previous month. PMI in the US remains stable, productivity expanded by 3.1 per cent on last year, and the National Federations of Independent Business has confirmed the Small Business Optimism index rose 1.3 points to 90.2, reflecting that fewer business owners expect business conditions to deteriorate over the coming months.

Overall, these figures are consistent with economic growth; recession is not an immediate concern across the Atlantic. The economy is certainly growing, just not fast enough to satisfy the Federal Open Market Committee; leading to speculation that additional quantitative easing (QE) will be taken up by the Fed. The next meeting is on 13 December, so traders have plenty of time to position themselves for the event. We would expect further QE to put pressure on the US dollar, but we should not forget the forex markets did not give a textbook reaction to the recent Bank of England’s QE round. It could be that they have now becoming accustomed to further liquidity.

The sovereign debt situation in Europe is still a significant concern for the US – especially the export industry. The EU members combined is its largest trading partner after Canada, accounting for $240bn in exports in 2010, 19 per cent of the US total. The last thing the US needs right now is another crisis led by the contagion effect of Europe, which could potentially prove disastrous.


The US Recovery Act was born in the midst of the financial crisis, with a focus on accelerating US job creation. This mirrors one half of the US Fed’s dual mandate and highlights the significance of the statistic for the economy and its currency. With macro data still struggling to inspire (bar odd glimmers of hope) and unemployment stubbornly high, it looks to have its work cut out before the US is back out on the open road.

Ben Bernanke last week slashed growth expectations and left the door ajar for further asset purchases to help stimulate the US economy. This didn't bode well for the dollar versus cable on two fronts sending the sterling-dollar cross higher. Looking to euro-dollar, new ECB president Mario Draghi also slashed European growth expectations and talked of “mild” recession by year-end. This should have added to the single currency’s sovereign debt crisis woes, but with growth problems on both sides of the Atlantic the overall move has been minimal. Even political disarray in Club-Med has failed to move it much after the last two month’s moves.

A US recovery is one thing, but in forex what is going on in the rest of the world is also crucial. Currency pairs reflect relative strength of one currency versus another. Given the euro’s woes, many ask why the dollar isn’t stronger and thus euro-dollar weaker. Safe-haven seeking should see dollar benefit (required for commodities and Treasuries) but the latter are already at record low yields (despite America’s loss of its AAA rating) and commodities have rallied.

The European Central Bank was expected to cut rates after earlier hikes, but its higher rates still make the single currency more attractive than the US and the UK. Macro data and news may provide indications of one country’s “strength”, but forex traders need to always keep an eye on how things sit relatively speaking.


Although the US recovery is more than two years old, the pace of growth over that time has been so insipid that for many it feels like the recession never ended. This is especially the case in the labour market, where the unemployment rate is still hovering around 9 per cent and overall employment is some 6m below the pre-recession peak. Consumer confidence remains very depressed, the public sector is retrenching, and there are significant financial and economic headwinds blowing in from offshore, especially from Europe. Over recent months, policy-makers at the Fed have revised their projections for 2012 and 2013 down substantially, cognisant that the productive-potential of the economy has been altered markedly by the last recession. This is despite the fact that the Federal Reserve continues to run an ultra-loose monetary policy. The Federal Open Market Committee (FOMC) has committed to an extended period of exceedingly low interest rates through to at least mid 2013, and is in the process of extending the average maturity on their balance sheet.

Against the backdrop of continued deleveraging by the household sector, the actual performance of the economy has been respectable. Consumer spending has held up, aided by positive growth in real incomes, business investment has recorded double-digit growth, and housing may have turned the corner. The exchange rate is very competitive, the Fed is doing all it can to stimulate growth, and the President is conscious that long-term fiscal consolidation needs to be balanced by the short-term needs of the economy. It will not be exciting over coming quarters, but on balance we would expect the recovery to chug along at a modest pace. For forex traders, if the US manages to avoid falling back into recession next year, then at the very least it will be in a stronger position than Europe. If the US outperforms most other major economies and does not revert to additional quantitative easing, this ought to be a helpful combination for a currency which looks relatively cheap.


As unemployment dropped to 9 per cent from 9.1 per cent the touchy subject of the Fed introducing more quantitative easing (QE) may have been curtailed for the time being. And despite October’s payroll being off mark with 80,000 jobs generated last month, versus the 95,000 expected, the significant revision of September’s number up to 158,000 from 103,000 and August’s number to 104,000 from 53,000 has overshadowed October’s low result. Other financial data from the US for October has also given signs that green shoots are emerging. ISM figures, a gauge of business conditions in the manufacturing and non-manufacturing industries, have remained above the 50 neutral figure, retail sales increased by 1.1 per cent month on month, consumer spending rose to 2.4 per cent from 0.7 per cent and GDP for the third quarter came out at 2.5 per cent. But one good month is not a sound enough base to say that the US is on the road to recovery.

In the near term, the US dollar outlook is bullish against a basket of currencies. Firstly, Australian dollar-dollar has fallen from $1.070 to $1.020, as the market priced in the widely expected 0.25 per cent interest rate cut. Given the Eurozone’s position and an expected slowdown in China and other Asian countries, additional cuts cannot be ruled out. On this stance Aussie-dollar could break the parity level and go back to trading in the $0.940-$1.000 range. Next, the market saw a surprise 25bp cut from the European Central Bank’s new president Mario Draghi, who warned that the Eurozone was heading back into recession, which signals there will be further cuts. There is no sign that the euro should gain value against the dollar. Lastly, the Bank of England will confirm its asset purchase target for November this week, which is highly likely to stay at £275bn and is set to continue until February. If they choose to prolong QE into 2012 then this may weaken the pound. We could see sterling-dollar cross back down to $1.500-$1.550.