Is the Fed lending support to the US dollar?
Investors who are bullish on the US dollar benefit when the value increases compared to a broad basket of currencies. Consumers are expecting the US dollar to strengthen as its runs parallel with economic improvements.
A strong appetite for equities and the expectation of higher interest rates have been supporting the US dollar rally for the past three months. According to Shelley Bergman, managing director of Morgan Stanley Wealth Management, the markets need to be watchful. He believes a strengthening dollar and higher interest rates could likely impact a lot of US companies with global operations.
2016 performance of the US dollar
The US dollar (UUP) (USDU) (UDN) has risen about 4.0% since the US elections on November 8, 2016. As you can see in the above graph, there wasn’t much movement in the US dollar from January to October 2016.
There could be a variety of reasons for the slow movement, including the Fed’s dovish monetary policy stance until the last quarter of 2016. After the elections, the dollar spiked in anticipation of more interest rate hikes. The hawkish comments from the Fed as well as European geopolitical uncertainty gave the dollar a boost. In December 2016, the US dollar had the steepest rise against the euro.
Is the US dollar losing support from improved economic data?
The PowerShares DB US Dollar Bullish ETF (UUP), which tracks the US dollar, rose about 2.0% in 2016. But in the past few weeks, from the end of January 2017 through February 22, 2017, it fell about 3.0%. The US dollar index has also fallen about 1.0% in the last month as of February 22, 2017.
Movements of the US dollar impact large-cap companies with international exposures. The strengthening of the US dollar affects the bottom line for these companies, and vice versa. Some of the companies that are impacted by the surge in the US dollar include Apple (AAPL), General Electric (GE), Microsoft (MSFT), and Pfizer (PFE).
In the next part of this series, we’ll see how the European economy is doing amid strong US activity and President Donald Trump’s new administration.