Since World War II, the US Dollar has been at the centre of international trade and banking. Through the years, almost all nations have allowed their respective currencies to float freely, while the need for central banks around the world to maintain large reserves of US Dollars for crisis situations has steadily declined. Yet, the US Dollar remains the most traded and trusted currency in the world.
Over 62% of all sovereign reserves are still held in US Dollars, according to a recent report by the International Monetary Fund. The volume of global trade conducted using US Dollars is more than three times the US share of global exports. Foreign firms favour it while transacting with customers and suppliers, as do investors, for whom the Dollar markets remain the most liquid, sophisticated and most likely to present reliable returns.
Naturally, for financial market players, the US Dollar is the most important currency to keep track of. Like any other currency, it is driven by geo-political developments and key economic releases by various government and non-government agencies in the United States. Here’s a look 5 such releases.
A comprehensive measure of US economic health, the US GDP figures are released by the Bureau of Economic Analysis (US Dept. of Commerce) at 8:30 A.M. EST on the last day of each quarter. Real GDP increased by 3.1% in Q1 2019, increasing from 2.2% in Q4 2018. Increasing GDP growth is favourable for the US Dollar. However, increasing tariffs on Chinese imports, risks of the Fed tightening its policies and potential conflicts with Iran over oil signal a slowdown in the latter part of 2019.
GDP is a lagging indicator, which means it simply tells us what has already happened, rather than predicting the future. Look out for Quantitative Easing and increased government spending, which can often make the figures misleading.
Higher interest rates attract foreign investments into the USA, which drives the US Dollar up. The Federal Funds Rate, determined by the Federal Open Market Committee (FOMC), represents the short-term interest rate or the rate at which money is lent by one bank to another. A higher Fed Funds Rate discourages consumer borrowing and business expansion, thereby creating a push to save. Money markets and certificate of deposit (CD) rates rise, as a result of an increase in the prime rate. A higher US Dollar makes local products more expensive. At the same time, US companies abroad see a decline in their real sales figures, as a result of a strong US Dollar, against other global currencies.
The FOMC is a branch of the US Federal Reserve, which, according to law, needs to meet at least 4 times a year. These meetings are usually held on Tuesdays and Wednesdays. After the meeting, the Chairman releases a press statement regarding the decisions made. Since January 2019, the Fed has adopted a rather dovish stance regarding interest rates, aiming at a consistent range of 2.25%-2.5%, amidst slowing global economic growth. After the last meeting in March 2019, the US Dollar fell against the Euro and Japanese Yen, as a result.
Interest rates cannot be studied separately from inflation rates in an economy. The primary role of the US Fed is to propel economic growth, boost employment and curb inflation. If the rates remain too low, demand for the US Dollar increases, leading to higher inflation, which can erode the value of the US Dollar.
This measures the average change in prices of a basket of goods and services over time. It is released by the US BLS at 8:30 am EST, usually by the 13th of each month, based on the preceding month’s consumption. A high rate of inflation can decrease the value of the US Dollar faster than what an average consumer’s income can compensate for. This results in a decline in purchasing power and can also lead to other effects, such as a decrease in the number of available jobs or slower GDP growth.
Inflation has to be moderate. Deflation (lowering inflation rate) can decrease money supply in an economy, leading to its contraction. The Fed refers to the Core Inflation rate, while establishing US monetary policies. This rate is expected to average 1.8% in 2019, slightly lower than the Fed’s target 2%.
Inflation can be better understood through consumer spending, which constitutes of two-thirds of all US economic activity. The US Department of Commerce’s monthly release on personal income and outlays can be an effective indicator of the nation’s economic health. It should also be noted that the core inflation rate doesn’t include volatile gas and food prices.
This report, released on the first Friday of each month at 8:30 A.M. EST, tracks the number of jobs added or lost in the US during the previous month. If the economy is creating jobs steadily, it means the Fed will likely raise interest rates in the future. This reflects positively on the US Dollar.
A lower rate of job growth indicates a slowing economy, decreasing the value of the US Dollar against other currencies. Higher unemployment rates mean consumers have less money to spend, which negatively impacts GDP growth, retail sales, the housing market and the stock market, to name a few.
The release of the non-farm payroll report usually results in increased volatility in the forex market. Remember that this too is a lagging indicator, since it reflects the portion of people who might have taken jobs in the last 4 weeks. Also, it considers part-time employees to be fully employed.
Technically, it is the US Census Bureau and the Bureau of Economic Analysis that together release the trade balance report, mostly around the 15th of each month, at 8:30 A.M. EST. The report reflects the nominal trade deficit figures, covering the previous two months’ imports and exports. An increase in nominal trade deficit means that imports exceed exports, which means that foreign goods are in greater demand, therefore bringing down the value of the US Dollar. Dollar demand increases when the demand for US goods rises on the global front.
The US trade deficit gap hit a 5-month high (8.4%) in May 2019, as imports surged to their highest since 2015. This is indicative of how the continuing trade war between US and China affects US business activity and economic growth. Front-loading of orders to meet tariff deadlines in May 2019 was also a factor.
America’s total trade is hugely dominated by imports and exports, which accounts for almost three-fourths of all trade. The US typically stands in surplus when it comes to services, while running into deficit in merchandise trade. The goods trade deficit also has to be inflation-adjusted, in order to get the actual figure. The report leaves out crude oil imports, which constitutes a major portion of the US economy.
The domestic currency of any nation is impacted by many other factors too, such as industrial manufacturing output, monthly construction spending and retail sales. Over the years, the US Treasury Yield Curve has become a useful economic indicator for investors, as has the Dollar index. Apart from this, economic and political developments in major economies around the world, such as the UK and Europe, have an impact on the Dollar’s performance.