The U.S. dollar continued to rise against all major currencies with the exception of the Japanese Yen. As long as the Yen extends its gains alongside the greenback and stocks are falling, we know that demand for safety is behind the dollar rally and not optimism about the U.S. economy. Consumer confidence rose to the highest level since July 2007 according to the University of Michigan consumer confidence which is encouraging but with the recent slide in stocks, we expect these gains to be fleeting and consumer confidence to reverse sharply in the following month. Import prices also increased more than expected but at 0.5%, inflationary pressures grew at a slower pace in October. There are 3 main reasons why the dollar is doing so well and continued improvements in the U.S. economy is one of them. While the deterioration in the Eurozone economy accelerates, most of the economic reports released over the last 2 weeks tell us that the U.S. recovery is gaining momentum. From the non-farm payrolls report to jobless claims, the trade balance, manufacturing activity and consumer confidence, there have been broad based improvements in U.S. data. Relative economic performance are playing a role again in the movement of currencies which is another reason why the dollar continues to rise:
3 Reasons Why the Dollar Continues to Rise
1. Europe is Still in Trouble – Every single day this week we learn that Europe is in more and more trouble and conditions have deteriorated so much that policymakers can no longer sugarcoat the story. For the better part of this year, the German economy has done the heavy lifting for all Europe but now they are beginning to feel the pain and that means big trouble for the region because the slowdown in the rest of Europe will only be exacerbated by weaker growth in Germany. Earlier this week, ECB President Draghi said that slower growth has reached Germany and this morning, Germany’s Economy Ministry confirmed that there would be “noticeably weaker†economic activity in the winter months, which means the fourth and first quarters. Weaker industrial production in France and Greece confirms that the rest of Europe won’t be able to make up for the difference. The ECB/IMF/EU standoff on Greece only compounds the pain and weakness for the euro.
2. Fiscal Cliff Still Looms Large – The main reason why good U.S. data is being ignored by the stock market is because the fiscal cliff looms large. Many investors are worried that it will continue to be very difficult for President Obama to get Congress to agree on a bipartisan deal that will resolve the fiscal cliff. As a result, stocks have fallen sharply, leading investors to seek safety in the U.S. dollar. President Obama will be speaking on the economy, the deficit and fiscal cliff at 1pm ET / 13 GMT but outside of calling for Congress to work harder, we don’t expect any market moving comments or groundbreaking announcements.
3. Stronger US Data – The final reason why the dollar continues to rise is because upside surprises in U.S. data is helping the dollar while disappoints in Eurozone data is hurting the euro. Based on the comments from Draghi and Germany’s Economy Ministry, we can expect more downside surprises out of Europe that may prevent the euro from recovering.
