Is the Dollar Losing its Grip on the FX Market?

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U.S. economic data is taking a turn for the worse and the disappointments have prevented the greenback from extending its gains against the euro and Japanese Yen. This has led some investors to wonder if the dollar is losing its grip on the forex market. It is the second day in the row that U.S. data surprised to the downside and the consistent disappointments over the last 48 hours is now causing many investors to wonder if the market’s enthusiasm for U.S. dollars were overblown.

We had economic reports from almost every part of the economy and all of the releases surprised to the downside. Jobless claims jumped from 328k to 360k, the highest level in 6 weeks. According to the Labor Department the surge which was the largest since Hurricane Sandy last year was not caused by the filings of any specific state. In other words, the increase in job losses was broadly dispersed across the nation, raising some concerns that the increase in filings represents deterioration in the labor market. Considering that claims have been at extremely low levels over the past few weeks, we feel investors shouldn’t read too much into this release until we see a more consistent trend especially since continuing claims declined. The surprise was in housing starts, which dropped 16.5% to their lowest level in 5 months. This steep decline, the largest since February 2011 illustrates how volatile housing market activity can be as starts rose 5.4% the previous month. However any concern about the sector was alleviated by the 14.3% rise in building permits. Not only was this the largest increase since June 2008, but the rise suggests that the housing market will regain momentum in the coming months. Meanwhile the 0.4% decline in consumer prices confirm that inflation is not a problem and for the Federal Reserve this means room to delay changes in monetary policy. The real concern is manufacturing – the Philadelphia Fed index turned negative in the month of May, dropping from 1.30 to minus 5.2. With manufacturing activity contracting in both the Philadelphia and NY regions, it is possibility that the sector as a whole suffered in March.

Based on the price action of the dollar, which has only given up part of its gains, investors are concerned but not overly distressed about the latest disappointments. A number of Federal Reserve Presidents are speaking today but the ones that we really need to pay attention to are FOMC voters Rosengren and Raskin. Rosengren has already spoken and as a well known dove, he was cautiously about the outlook for the U.S. economy. He said that while the labor market has undergone gradual improvement and consumer spending has been relatively robust, the fiscal drag could lead to tepid overall growth. Considering that there is still a “fair amount” of U.S. labor market slack, Rosengren feels that “it still makes sense to have accommodative policy,” which suggests that doesn’t support tapering asset purchases. Fed policymaker Raskin speaks around noon and as a moderate dove, she could make similar comments. Non-voting members of the FOMC including Fisher and Plosser were more vocal and made it clear they support varying the amount of bonds purchased as early as June.

Kathy Lien
Managing Director

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