Revenge of the dollar

Midyear FX outlook

The Greenback Will Rise Again

Soft data in the early half of the year squelched U.S. economic growth but with the thawing of a severe winter, growth gradually resumed and data has improved significantly as the American unemployment rate fell to 6.1% in June from 6.3% in May.

Excluding GBP(CME:BPU4), the USD has proven resilient against the EUR but weak against commodity-driven currencies such as the CAD. The picture will likely change in the second half of the year: the greenback is expected by many to strengthen against the euro, yen, and Canadian loonie(CME:CDU4).

The question on every investor’s lips is, “when will the Fed raise interest rates?” With the Fed’s quantitative easing program due to end in October, Chair Janet Yellen must cautiously navigate the world through uncertain and potentially hazardous economic waters. After all, it’s well known that if the Fed coughs the planet catches a cold, or so to speak.

At the start of the year, U.S. economic growth was expected to be near 3% and it now sits at about 2.5%. As the recovery solidifies stateside, a shift away from consumer-led resurgence toward business investment should bolster the American economy, but many economists have downgraded their U.S. gross domestic product growth expectations for the latter half of 2014 to 1.6% -- well below the 2013 pace of 2.6%.

Bets on British Rate Hike

Of all the major central banks investors expect will be the first to raise interest rates, it’s the BoE that most have pegged for a November rate hike. The BoE’s Monetary Policy Committee (MPC) unanimously voted to maintain the bank’s rate at the record low 0.5% and its stimulus program at £375 billion in July.

Unemployment on the British Isles has dropped below the bank’s targeted level – its lowest rate since 2008 – and inflation (at 1.9% in June) has neared the Old Lady’s preferred 2% threshold. But BoE Governor Mark Carney and his cohorts are leery of squeezing the life out of Britain’s tentative economic recovery by acting too aggressively, too soon.

There’s also the matter of Scotland holding a referendum in September to see if there’s a real appetite among the citizenry to break away from England and re-establish its independence. It will indeed be interesting to see how the referendum plays out. The most recent polls suggest the “No” campaign (pro-U.K.) has an estimated 16-point lead over the separatists.

British Prime Minister David Cameron will face the voting public in early 2015 in his bid for re-election. Provided Scotland votes to stay put it is expected he will fare well in the next federal election. That any notion of an independent Scotland would be allowed to share the pound with the rest of the U.K. is a “dead parrot” (apologies to Monty Python) certainly aids both the No campaign’s and Cameron’s election hopes.

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