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The era of the weaker dollar

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The era of the weaker dollar

Elizabeth Belugina, Head of Market Analytics at FBS

The US dollar index has been in the downtrend since the start of 2017. The most sizeable correction to the upside took place in September-October. After that, the slide resumed. The greenback fell to the lowest levels since the end of 2014.

From the first sight, this trend in the currency market doesn’t look logical: the American economy is doing fine and the central bank is in course of a hiking cycle. What causes the depreciation of the US currency?

depreciation of the US currency

Economic background

Donald Trump’s goal was to make America great again. As an entrepreneur, he is certainly an encouraging figure for businesses.

US economy is indeed in a rather good shape after the first year of his presidency. Average annualized GDP growth rate equals to 3%. There are opinions that Trump has just been lucky. The US economy had already been on the right track before Trump arrived, and the Federal Reserve should take credit for things like the decline in unemployment to 4.1% in December 2017. Plus, the global economy is growing at a nice pace and that contributes to the US economic momentum as well.

Will the United States manage to sustain the recent growth pace and even increase it as Trump has promised? That depends on whether the authorities manage to ignite consumer spending and labor productivity.

The productivity of American firms and workers rose by 1.2%, rebounding from a 0.1% drop in 2016. Still, that’s low compared with average annual increases seen in 2000-2006. US consumer spending rose solidly in December. At the same time, savings fell to a 10-year low – a troubling sign for future consumption and economic growth.

US economic policy is the key

A more thorough analysis leads to an assumption that the economic policy of the US government is the main factor responsible for the dollar’s weakness. Treasury Secretary Steven Mnuchin said in Davos that a weaker dollar is good for the United States. Although he later said that he was misunderstood, the scope of market’s reaction to the news shows that traders take the intentions of the US government seriously.

Donald Trump has been active in terms of economic policymaking. One of his main projects is the tax reform: US corporate income tax rates were finally lowered to an internationally competitive level. However, it remains to be seen how many actual benefits the reform will bring. Specialists at Moody’s Investors Service doubt that the tax overhaul will boost business investment. There’s a risk that companies will more likely reward shareholders than invest in growth, and tax cuts for the rich won’t encourage higher consumption.

Another feature of Trump’s policy is trade protectionism under the “America-first” banner. The president’s administration imposed a punitive tariff on imported solar panels and foreign washing machines to make life easier for domestic producers.

There’s also a risk that the US will withdraw from the North American Free Trade Agreement (NAFTA) with Mexico and Canada. According to the research of Oxford Economics, such step in 2018 would reduce US GDP growth by 0.5 percentage point in 2019, while Trump’s goal of diminishing US trade deficit won’t be reached.

Such actions pursue a populistic goal: to find an external source of problems and try to achieve quick improvement by punishing it. A strategy like this may have far-reaching and unwelcome consequences. The escalation of trade tensions may lead China to take retaliatory actions. The recent data showed that in November China reduced its holdings of US Treasury bonds to a 4-month minimum. There are reports that China was planning on slowing or even halting the accumulation of the US debt – bad news for the USD.

The desire to solve domestic economic problems at the expense of other countries might have a negative impact on global economic growth and revive currency wars, in which countries compete by devaluing their currencies.

US dollar as the whipping boy

The Federal Reserve went far ahead of other central banks in policy normalization. The regulator raised rates three times in 2017. The same number of rate hikes is expected this year. However, it turns out that monetary policy tightening doesn’t lead to the stronger dollar anymore. US yields rose, but 90-day correlations between 2-year US-Germany yield spread and EUR/USD fell to a minimum since the end of 2015.

The thing is that the US rates are still not high enough to attract investors which now have plenty of other opportunities. The robust economic growth made many traders choose to buy the soaring stocks over the fixed-income instruments like bonds. Moreover, although weak dollar helps US exports, it devalues all types of American assets. European equities are taking advantage of it: the region accounted for more than a third of global equity fund flows in 2017.

In addition, the lower the USD falls, the more sense global central banks and sovereign wealth funds have to diversify from it. Dollar reserves fell from 66% in 2015 to 63% in September 2017.

It’s also necessary to mention that markets live by expectations. For several months now, investor minds were fixed on the idea that the European Central Bank will move towards the end of its monetary stimulus program. Traders have been vigorously reacting to the positive news from the euro area hunted for policy normalization signals in the ECB statements. The Federal Reserve’s rate hikes, on the other hand, were quickly priced in and excited no one’s imagination.

The new year will certainly bring uncertainty. The ECB may start expressing displeasure with the strong euro or inflation in G10 will finally gain pace so that everyone will be tightening. A new person will take the reins of the Fed. Although many investors think that Jerome Powell’s approach will be very similar to that of Janet Yellen, no one can know that for sure.

US core consumer prices recorded their largest increase in 11 months in December, rising 0.3%. Economists hope that a tightening labor market, rising commodity prices, a weak dollar and fiscal stimulus will lift inflation toward the Fed’s 2% target this year. The Fed also said at its January meeting that it expects a pickup in inflation. If so, the Fed will remain on the tightening track. It’s necessary to understand, though, that continuation of rate hikes at the current pace is not a serious bullish driver for the USD, it just doesn’t let it sink faster.

From the technical point of view, DXY fell to a new range and will have a hard time returning above 92.00. Support levels – or downside targets – are at 86.50, 84.70 and 80.00 as a more long-term landmark.

As the bond guru Jeff Gundlach said, “usually when you get a bad year in the dollar, it’s followed by one or two more bad years”. That is surely just an arbitrary observation, which shouldn’t be taken as a call to short the greenback. Yet, there are many reasons to think that 2018 will be the year of vigorous economic growth, strong euro and high commodity prices. That is, of course, if S&P bubble doesn’t burst and make everyone flee to safe havens.

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Energy stocks drag down FTSE 100, IG Group slides

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Energy stocks drag down FTSE 100, IG Group slides 1

By Shivani Kumaresan

(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.

The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.

Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]

“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.

“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.

British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.

IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.

Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.

Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)

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Wall Street bounce, upbeat earnings lift European stocks

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Wall Street bounce, upbeat earnings lift European stocks 2

By Amal S and Sruthi Shankar

(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.

The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.

All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.

Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.

Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.

Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.

The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.

“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.

The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.

“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.

Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.

Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.

Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.

Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.

(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)

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Miners lead FTSE 100 higher on earnings cheer

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Miners lead FTSE 100 higher on earnings cheer 3

By Shivani Kumaresan

(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.

BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.

Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.

“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.

The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.

The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.

Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.

Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.

WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.

(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)

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