The Bullish Case for the USD – Introduction
The US dollar has cooled recently cooled down after the 10% rise in 2018. Less than two weeks ago, the dollar index declined after the Federal Reserve announced that it would pause the hiking cycle. In the December meeting, the bank pointed to two more rate hikes this year. At the time, the bank was criticized for not reading the market sentiment well. In the previous meeting, the bank based the new decision on the weakening of the global economy, increasing uncertainty, Brexit, and other challenges. The chart below shows that the dollar index has paused in the recent few weeks. In this article, I will explain the bull case for buying the dollar.
First, the US economy remains being robust. This week, the US will release the GDP numbers for the fourth quarter. The data is expected to show that the economy expanded by 2.6%, which will be lower than the third quarter’s growth of 3.5%. While the economy is slowing for sure, it remains being robust. On Friday, the Labor department released the jobs numbers that were better than expected. The numbers showed that the economy added more than 312K jobs. At the same time, the unemployment rate remains at 4.0%, which is an indication of full-employment. In addition to this, wages are continuing to grow. Further, housing numbers released last week were robust.
At the same time, the other US peers are not doing well. In the European Union, the economies are under pressure. Recent data from the region shows that the manufacturing sector is contracting while business and consumer confidence is easing. France, the second biggest economy in the region is facing political challenges, which could affect the growth. Germany too is seeing its economy weaken. Just last week, data from Italy showed that the economy was now in recession. All these factors show that the ECB will be unlikely to hike rates as it had earlier promised. This is because hiking during contraction could lead to more problems.
The Japanese economy too is not doing well. In recent weeks, the data released from the country show that the economy is softening. In fact, both the manufacturing and services PMIs have all been in the downward trajectory. Worse, the country’s inflation rate remains being much lower than the BOJ’s target of 2.0%. In addition, its biggest companies like Nissan, Mitsubishi, and Zozo are struggling as evidenced by the recent data. This reduces the likelihood of a rate hike to almost zero.
In the United Kingdom, the country is facing the challenge brought up by Brexit. The country has less than two months to know whether a deal will be made or not. In recent weeks, the sterling has strengthened significantly as investors expect a deal to be made. An exit without a deal will be disastrous for the economy because many companies will flee. Therefore, when BOE meets this week, they are likely to warn the politicians against the risks posed by exiting without a deal. Even with a deal, the country’s economy will be hurt.
The euro, sterling, and the Japanese yen are the biggest constituents of the dollar index. Therefore, with the other economies faltering, investors will likely find solace in the United States, which is seeing signs of strength.