The US dollar index has been on an upward trend since January this year. The pair had a major reversal after the Federal Reserve released its interest rates decision. In the statement, the bank reversed its earlier hawkish views and said that it would be patient on future interest rates hikes. This was a bad sign for the US dollar, which reacted by having a major decline. However, after that, the dollar index has continued to rally and has reached the highest level since December last year.
The reason for that is that other countries that make up the dollar index are not doing well. In Europe, the economy is going through a challenging period with countries going through different problems. Recent data show that Germany could enter a recession later this year. Recent data on factory orders, manufacturing output, and industrial production has been weaker than expected. In France, the country has been facing riots as opposition to Emmanuel Macron mounts. This is threatening the pace of recovery. In Italy, the country is now in a recession. Other European countries too are not doing well. This means that the bank could take a longer period before it increases rates.
In Japan, the second-biggest constituent of the dollar index, all is not well. Recent data shows that the country’s rate of inflation has remained below the 2% target. While the unemployment rate has been low, it has not translated to more consumer spending. The country’s efforts to stimulate this spending has not been effective either.
In the United Kingdom, the economy is going through a difficult period as Brexit continues to cloud the economy. Indeed, the economic data released yesterday showed that the country’s economy grew by the slowest pace in years in the fourth quarter. This was caused by a number of factors such as low capital investments and low consumer spending. The sluggish growth will likely continue as the uncertainty on Brexit continue.
The weakness is also happening in Canada, Switzerland, and Sweden, the other components of the dollar index.
On the other hand, the US economy is doing pretty well. Inflation has been contained while the economy has continued to add jobs. In fact, in the past two months, the non-farm payrolls have increased by more than 300K, which is a record. Wages are growing and corporate profits are doing good too. The country is also negotiating a trade deal with China, that has the potential of accelerating the growth in the country.
Therefore, while the Fed has announced that it will be patient, the truth is that it is still hawkish on the economy. This could see it do one or two hikes this year. As such, there is a likelihood that the USD index will continue moving up.