The rally in the dollar overnight following upbeat U.S. economic news may well mark the start of something currency strategists say they have not seen for some time – the dollar’s direction being driven by the prospects for the economy rather than just risk appetite.
Tuesday’s data for July have dampened talk of further monetary easing from the Federal Reserve and could also set the tone for currency markets ahead of the central bank’s annual symposium at Jackson Hole, Wyoming, at the end of this month, analysts add.
After the data release, the dollar rose against all major currencies. In Asian trade Wednesday, the greenback hovered near a one-month high of 78.94 against the yen and was steady against the euro .
“For once, the dollar traded on the outlook for the U.S. economy and not on risk appetite,” said Kathy Lien, Managing Director of FX Strategy for BK Asset Management in a note.
“While we believe that the rebound in consumer spending and inflation is not enough to alter the central bank's plans for monetary policy, it could trigger a tinge of optimism from (Federal Reserve Chairman Ben) Bernanke, which may be enough to help the dollar hold onto its gains,” she said.
The dollar has been edging higher since May, with the dollar index – which measures the dollar’s value against a basket of other major currencies – rising almost 5 percent.
Since the start of the year, the dollar has gained about 4.8 percent versus the beleaguered euro and 2.5 percent against the yen. Much of the gains stem from investors’ preference to hold the U.S. currency against the backdrop of a debt crisis in Europe and volatile markets, analysts say.
Sean Callow, Senior Currency Strategist at Westpac, said that the movements in the currency markets suggest that expectations for the U.S. economy have been too low.
Jackson Hole Key
Focus is now on the Fed’s meeting at Jackson Hole, Wyoming, on August 31st, which has become an annual check point on the state of play in the U.S. economy. Indeed, a speech by Bernanke at Jackson Hole in 2010 laid the ground work for the Fed’s bond-buying program to revive the economy – one that also triggered weakness in the dollar.
“This year’s speech is highly anticipated because the Fed appears to be on the fence when it comes to ,” said Callow. “So when you get good numbers like the retail sales data, that does lower the chances of further quantitative easing and that is a good sign for the dollar.”
He expects the dollar to edge up to 80 yen over the next month.
Currency analysts added a note of caution, saying that further positive economic news was needed before expectations for further monetary easing were fully scaled back.
“One data set doesn’t make a trend. We need to see the upbeat data continue to see the quantitative easing expectations really scaled back,” said Emma Lawson, Senior Currency Strategist at National Australia Bank in Sydney.
U.S. retail sales rose 0.8 percent in July from a month earlier, marking the first rise in four months on broad demand for a range of goods and a sign that consumer spending could bolster economic growth in the third quarter of the year.
There have also been signs of improvement in the U.S. labour market - the latest payrolls numbers showed 163,000 jobs were added in July, above expectations for a 100,000 gain, while the number of Americans filing new claims for jobless benefits fell unexpectedly last week.
The positive data, together with signs of improvement in the U.S. jobs marketand no further bad news from the euro zone, may give Bernanke reasons to be optimistic, Lien at BK Asset Management said.
“Originally, many economists and traders believed that Jackson Hole would be the forum at which Bernanke laid the foundation for QE3 in September. But if these improvements in U.S. data continue and Spanish bond yields remain below 7 percent, the Federal Reserve has very little reason to rush into another round easing,” said Lien, referring to a third round of expected quantitative easing by the Fed.
- By CNBC's Dhara Ranasinghe