Financial Update 9-3

The US dollar, which had been looking weak for much of the last year, has picked up quite a bit over the last few weeks and it’s now looking much healthier. Right now it’s at a 14-month high against a basket of the other major currencies and looks set to climb even more in the short term. Last week’s figures put the .DXY dollar index at 83.039, better than it’s been since last July.

Some of the dollar’s resurgence can be put down to weakness in other currencies, especially the Japanese Yen, but that doesn’t account for all of it. The Euro is currently rising but is still hovering near a one-year low against the dollar – and even briefly hit that mark on Wednesday, dropping to $1.3110 before pulling back to $1.3135 as it gained more ground against the Yen. Japanese investors are hesitant right now as they wait for details of changes in the country’s huge public pension fund and that’s pushing many to sell Yen.

At the same time the dollar is showing its best value against sterling for five months, currently trading at around the £1=$1.645 mark. That follows a 0.8 percent fall in the British currency, its biggest one-day loss since the beginning of the year. The Australian and New Zealand currencies also slipped at the same time. Sterling is likely to stay relatively weak in the short term as UK growth slows.

Another poor week to add to the woes for gold for the year.  Gold Bullion sales have continued to slump in the midst of much uncertainty in the world.  Look for continued resistance for the yellow metal to finish out the year.

A combination of factors are helping the dollar’s steady rise but the most significant right now are probably a jump in two-year Treasury yields and the latest figures on the US economy. Manufacturing output is at its highest in over three years and there’s also been healthy growth in the construction sector, reversing a previous negative trend. The economic recovery has been patchy ever since the very poor first quarter growth figures but the recent trends are looking a lot better, which is bound to be good news for the dollar.

Things to watch in the near future include the upcoming European Central Bank policy meeting, which could see the organization taking steps to avoid deflation and boost growth. The prospect of a more hands-on ECB is likely to give the dollar another boost, as the ECB doesn’t have a great track record when it comes to stimulus action. A policy review by the Bank of Canada could also have an effect, as could the publication of Australia’s Q2 growth figures.

Of course there are some cautionary notes as well, and the situation in Ukraine is definitely one of them. With open fighting now breaking out between Ukrainian and Russian troops there’s the prospect of turmoil in the European markets, and while that could depress the Euro and further boost the dollar in the short term a prolonged European slowdown would have a knock-on effect on the USA. That’s likely to give the Yen a chance to recover some of its relative value.

The dollar could slip back, especially against the Yen, but right now it’s looking like a good deal. It’s definitely nice to see some movement in the right direction.