Weak economic data from China and Europe reignited concerns about the global economy, propping up the US currency.
The dollar strengthened again globally and reached its highest level since March. The latest economic and inflationary data from the United States continue to show mixed results regarding the Federal Reserve’s objective of bringing inflation to 2% per year, although they show a progressive improvement. In this context, the economic slowdown that Europe is experiencing and the weakness of China are causing the US currency to rise to its annual peak. Analysts consulted by Ámbito point out that until a clearer sign of a slowdown in the US economy appears, the trend will continue to rise.
The dollar index, which compares the currency with a basket of currencies, has rebounded strongly in recent weeks and reached 104.75 points, the highest in six months. At the beginning of the year, the indicator had pronounced the decline that began in October 2022, when inflation began to ease. In July this year, the DXY touched 99.4 points, its lowest since March 2022, before the Fed’s tightening monetary cycle begins.
Regarding the latest inflation data, the IEB Group highlighted that the PCE price index, which is the thermometer used by the Fed’s FOMC to set its long-term inflation target of 2%, stood at 3.3 % YoY, in line with consensus expectations and slightly above the Federal Reserve’s year-end projection of 3.2%. “Where the focus remains is on the core definition, the published yoy reading was 4.2% also fully in line with consensus expectations, but confirmed a slight acceleration from the previous 4.1% yoy reading. , as well as it is also a little further from the Federal Reserve’s projection for the end of the year of 3.9%”, they pointed out.
Regarding the labor market, the JOLTS report was published last week, which surprised with a number of new job offers of 8,827,000, which was below the consensus expectations of 9,559,000 and also below both from the previous reading (9,528,000), as well as from its downward revision (9,165,000). These figures indicate that the labor market is gradually slowing down after months of monetary policy tightening. In this framework, the market assigns a 93% probability that the Fed will maintain interest rates at 5.25-5.5% at the next meeting.
Still, weak economic data from China and Europe propped up the US currency. As for Europe, the Euro Zone service sector trade activity index fell to 47.9 in August from 50.9 in July, indicating the first contraction in activity since December 2022. Likewise, the German economy , the first in Europe, maintained a stable GDP at 0.1% and has not experienced a real advance since September 2022, which fueled expectations that the ECB will maintain the monetary rate at the next meeting so as not to further harm activity. Within this framework, the euro lost ground against the dollar, depreciating 5% in the year.
Meanwhile, activity in the service sector in China grew at the slowest pace in the last eight months, despite government incentives. The sectoral index marked 51.8 points in August, below expectations of 53.6 and 54.1 points in July. Within this framework, the yuan deepened its depreciation against the dollar since the beginning of the year and, currently, returned to 7.30 yuan per dollar, the highest since 2008. So far this year, the yuan has depreciated 8.2 % against the dollar.
perspectives
Leonardo Chialva, partner and portfolio manager at Delphos Investments, pointed out: “The rise in the dollar does not respond to the strength of the United States, which clearly the indicators are coming out weaker, but to the weakness of the rest, such as that of the European data, where the euro is the main component of the dollar index. Currencies are moved by rate differentials and rates by the health of the economy. Although the US economy shows signs of soft landing, the European one shows signs of stagflation and in that sense the dollar gained ground”.
Looking ahead, Chialva stressed that “until the US economy shows clear signs that it is entering a recession, it is likely that rates in the United States will remain firm, in the rest of the world they will be looser and that small differential will of the US makes the dollar have a relative strength”.
Source: Ambito
