The United States is entering a period of accelerated growth, Fed officials said.
The statistics released on Thursday allowed investors to revise their expectations regarding the dynamics of the American economy for the better and pushed the US stock market to new record highs. Similar successes could be expected from the greenback, but there were not so many people willing to buy the American currency.
The USD index was able to rise slightly after having earlier dropped to an almost monthly low of 91.51 points.
However, the dollar is still close to posting its worst two weeks since early 2021.
US retail sales rose 9.8% in March, beating economists’ expectations for a 5.9% rise. The indicator has not shown such a powerful dynamics since May last year.
Claims for unemployment benefits in the country fell to their lowest level for the first time in more than a year last week.
The fundamentals look very positive for the dollar. However, the US currency failed to take full advantage of strong US economic releases.
It is possible that market participants could have taken into account the strong data on the United States in their quotes in advance, since recently everyone was just talking about a strong recovery in March-April.
In addition, a significant part of the increase in consumer spending is fueled by direct payments to the population, which will last for a maximum of another month. In addition to this, the effect of last year’s low base was added.
The American currency remains under pressure due to the “soft” rhetoric of the FRS.
“We expect a significant recovery in the national economy in the second half of the year,” San Francisco Fed Governor Mary Daly said Thursday.
At the same time, she noted that the US economy is still far from significant progress in achieving the US Central Bank’s inflation targets of 2% and full employment – the bar set by the Fed to begin considering the possibility of reducing its support for the national economy.
M. Daly’s comments are consonant with the recent statements of the FRS Chairman Jerome Powell.
On the face of it, an unexpected drop in the number of claims for benefits, as well as a sharp rise in consumer spending in the United States, could force Fed officials to revise their interest rate schedule.
However, the head of the American Central Bank does not cease to convince market participants that the tightening of monetary policy by the regulator will occur later than is included in the quotes of exchange-traded assets now.
This week, J. Powell once again dismissed fears about the acceleration of inflation, saying that this process will be temporary.
This allowed investors to turn a blind eye to the fact that consumer prices in the United States rose at their highest pace in more than eight and a half years in March.
The increase in the indicator did not lead to the formation of expectations of an accelerated tightening of monetary policy by the FRS, but, on the contrary, increased the demand for US debt obligations.
The regulator claims that it does not plan to sell its Treasuries on the market. This factor also shifts the balance of power in favor of buyers of American debt securities.
So it is hardly surprising that US long-term bond yields continue to retreat from their 15-month highs reached last month.
On Thursday, the 10-year Treasury figure slipped to 1.531% from 1.637% on Wednesday.
Falling yields in the United States reduce the investment attractiveness of the US currency.
Over the past two weeks, the greenback has noticeably weakened, and if it does not return, then its recent turn to decline can be considered definite.
Currently, the USD index is trading just above 91.00 points (the mark near which the 100-day moving average passes). Further significant support is not seen until the level of 89.20.
Experts note that from a historical point of view, the dollar still has room for decline.
A year ago, the US currency began to retreat from its 2003 peak levels. A further 10% drop will push the USD Index back to its averages for the 2005-2014 period. This is unlikely to threaten the greenback with losing his reputation as a reserve currency, analysts said, and would not be the highest price for the United States to reaffirm its status as the world’s leading economy. In addition, an increase in the competitiveness of American exports will be a pleasant bonus.
So far, the dollar is trying with all its might to stay afloat.
On the one hand, the positive stats on the US do not allow the greenback to dive deeper, on the other hand, the appetite for risk, growing as the stocks reach new record highs, puts pressure on the US currency as a “safe haven”.
“Declining Treasury yields and a positive attitude to risk have become a cocktail fueling the weakening dollar at the moment. The rally in the US stock market has driven a wedge between strong data and greenback, ”said strategists at National Australia Bank.
“The mood in favor of risk is improving, which leads to lower yields on bonds and the dollar. We believe that the downward trend in the USD will continue, ”Citigroup said.
Some analysts believe that the dollar still has a chance to resume growth.
In their view, the greenback could strengthen in the coming months, as the economic outlook for the United States promises to be even brighter.
“The dollar is still struggling to get back on its feet in April, even though the US macroeconomic improvement narrative is as accurate as possible,” strategists at Westpac said.
“However, any USD upside potential that is realized in the second quarter is likely to be more subdued than in January-March. At least there is no more fuel for positioning. More than half of the short positions in US dollars for 2020 were closed in the first quarter, ”they added.