Over the last several days I’ve noticed there has been quite a bit of US dollar strength. I’ve noticed it not just in the majors, but also in the exotics. With the Q2 GDP report right around the corner I wondered if that strength was telling us something. So I looked at what the Dollar Index did ahead of the last several reports and what those reports looked like.
I understand this is a very small sample set but rather than spend time going further down the rabbit whole I basically came to the conclusion that we’re not going to get any secrets from this data alone. Now I used the Dollar Index which is a weighted basket of currencies versus the dollar. But is this move stemming from US Dollar strength or is it weakness in the Euro or the Yen?
The Euro is showing obvious signs of weakness. It’s been this way since a failure at the 1.40 handle in early May, a full month ahead of the negative interest rate announcement out of the ECB. In the last two months the Euro has given up 6 cents to the Dollar. But I’m still not ready to call it a US Dollar victory. Let’s look at the Euro/Yen cross.
Similar story here, in May the pair traded near 143, today it sits below 137. So the story seems to be continued Euro weakness in the face of negative rates. Makes sense that a negative rate would have a negative impact on the currency. So it’s not just US Dollar strength but more like Euro weakness that’s causing the Dollar Index to rise.
Is there a point where Euro weakness becomes a problem for the US economy?
As the Euro sinks, it makes European goods cheaper for US consumers to purchase and has the opposite pull on US goods purchased by Europeans. This would have a negative effect on Net Exports for the US and thus be a drag on the GDP number. Of the 14% of GDP we export, Europe is a small fraction of this. So that drag would likely be very small.
I think the point where Euro weakness really becomes a problem for the US is very far away from where we are now. It seems like the Euro area is just taking its place in line following up Japan in the global “race to the bottom” for currency valuation. If the world was really worried about it, you wouldn’t have yields at 200 year lows in European sovereign bonds.
What do you think?
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