US Dollar is on Fire and Has Even Further to Climb Warn Exchange Rate Analysts
- Written by: Will Peters
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It would seem that the US dollar exchange rate rally - the highlight of the foreign exchange markets at present - is showing no signs of abating.
The dollar exploded to new 2- and 4-year highs against the euro and a currency basket after an overall solid U.S. jobs report.
Nonfarm payrolls jumped 248,000 in September, topping forecasts of 215,000. August got upgraded to 180,000 from 142,000. Unemployment sank to a nearly normal 5.9 percent, the lowest in 6 years.
"The market appears to have caught rate hike fever which has powered the dollar stronger across the board and in line for a record 12th straight week of gains versus a currency basket," says Western Union in a note to clients concerning the most recent spate of USD climbs.
Today we consider two pieces of evidence that suggests the dollar rally is not yet done; in fact the climb could be in its infancy.
For reference, ahead of the new week:
- The British pound to US dollar exchange rate = 1.5975.
- The euro to US dollar exchange rate = 1.2516.
- The US dollar to Japanese yen exchange rate = 10976.
- The US dollar to Canadian dollar rate = 0.17 pct higher at 1.1245.
(Please note that these are wholesale rates, your bank will affix a spread at discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX in some cases, find out more).
The View from Bank of America Merrill Lynch Global Research
Emanuella Enenajor at Bank of America tells us the dollar has further to go:
"The US dollar is on fire, rising by 7% since the end of June. Although Fed officials and economists have raised concerns that the dollar’s rise could hurt the economy, the gains need to be taken in context.
"As we can see from the Chart, the USD has been deflating on a real effective basis since 2002, and is still well below its 20 year average.
"In fact, the recent USD increase is a mere blip in a much more persistent trend of currency depreciation, leaving trade fundamentally in a much better place than where it was in the last expansion.
"The dollar is rallying because the US economy is outperforming the rest of the world. That is a very different story to what we saw in, say, 2009, when the currency strengthened on flight-to-quality flows into treasuries during the height of the crisis. Thus, the economy is in a better position to withstand a currency shock today."
The View from HSBC
In a note to clients, HSBC also forecast the dollar exchange rate to continue its climb:
"We are only at the early stages of a USD bull run. We believe this will ensure it is not only the strongest currency in 2014, but also in 2015. Even though we have long been advocates of a strong USD, we have substantially revised many of our forecasts to reflect this expected USD supremacy.
"We argue the current USD rally is unlike any we have seen before. True, expectations of US monetary tightening in response to an accelerating US economy have played their conventional part.
"But unusually, much of this USD strength is the mirror of efforts elsewhere to weaken currencies, not in a bid to stimulate growth through exports, but to stave off deflation and prevent inflation expectations from becoming de-anchored. Reviving exports is a secondary objective at best.
"This is a currency war where stealing inflation rather than growth is the goal. Therefore, unlike previous USD rallies, this one will not be tripped up by US current account deficit concerns. The new feature is whether the US economy can generate sufficient inflation internally to tolerate the deflationary impact of a stronger USD."
