The U.S. dollar is trading higher against all of the major currencies this morning with the exception of Australian dollar, which is benefitting from a long overdue short squeeze. Today’s U.S. economic reports were mixed. GDP growth slowed to 3.2% from 4.1% in the fourth quarter while jobless claims increased to 348k from 329k. While these numbers don’t scream the need for taper by the Federal Reserve, it doesn’t refute their decision to do so either. Anything above 3% GDP growth is healthy and consistent with a continued recovery in the U.S. economy especially when personal consumption growth accelerated to 3.3% from 2%. This was slightly weaker than expected but still a strong reading. When combined with third quarter results, this was the best pace of growth for the second half of the year since 2003. Of course, there are always areas of concern and pockets of weakness with fixed residential investment declining and overall growth slowing but in general, the data was positive for the dollar. The increase in jobless claims would be concerning if not for the potential impact of inclement weather and the MLK holiday.

Looking ahead, the focus continues to be on the emerging markets. While the Turkish Lira, South African Rand and Russian Ruble bounced today, the Hungarian Forint and Polish Zloty continued to fall. The euro has been hit hard by the turmoil in the region and further losses are likely. We expect a move down to 1.35 in the EUR/USD. USD/JPY on the other hand is poised for further gains. The Federal Reserve’s decision to overlook the volatility in the emerging markets and one month of weak job growth bodes well for the greenback. USD/JPY is not immune to the rollercoaster ride in EM, but if stocks stabilize and Treasury yields start to rise again, USD/JPY could find itself trading back at 104. However for the time being 103 is resistance. The following chart shows how important the direction of stocks has been for USD/JPY over the past 6 months.

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