In the second half of May the US dollar advanced due to rising risks of the Greek default and withdrawal from the European Union. However, July, 20 the dollar gained only 0.5% as compared to the beginning of June. Thus, despite strong fluctuations, US Dollar Index has been traded in a range for 2 months. It has been demonstrating a bullish trend last four weeks . We suppose that it was encouraged by good private sector statistics. For a whole year unemployment rate in the USA has been low. In June it fell to its lowest since April, 2008, making 5.3%, which resulted in personal income growth due to the strong dollar. New Homes Sales hit a 7-year high in the same month. Building Permits soared to 1.34mln in absolute terms – the maximum since July, 2007. American citizens feel rather comfortable. For example, University of Michigan Consumer Confidence index has been balancing above 90 for 8 straight months. Macroeconomic statistics bolster investors' confidence about the early rate hike by Fed. We believe this scenario is very likely, given declarations by Fed representatives, including Reserve System Chair Janet Yellen. She confirmed that the first rate raise may take place in early autumn. It does not contradict the main macroeconomic indicator of inflation; the Consumer Price index has been gradually growing for 5 consequent months.
Rate hike is one of the basic factors that underpin the dollar. Meanwhile, in spite of Federal Reserve rhetoric, it is difficult to say when it may happen. The intrigue will remain, providing the currency market with volatility. The point is that American GDP slipped 0.2% in the first quarter, yet, FRS confirms that if the dollar gains 10%, the economy will contract 0.5%. That is why the American regulator will probably try to postpone rate hike, confining itself to “word intervention”. That is why the second quarter GDP report becomes of prime importance. According to official forecasts, it is supposed to increase 2.5%, outrunning by far the first quarter statistics.
Important macroeconomic data, expected in the US in the near future:
July, 27 — Durable Goods Orders;
July, 28/29 — Regular FRS meeting;
July, 30 — Preliminary GDP, Q2;
August, 3 — Personal Income in June.
As far as eurozone is concerned, we believe that the €86bln bailout extension will increase European countries' financial burden. However, this is not our main subject here. The economies of such countries as Italy, Spain and Ireland have a very large foreign debt to GDP ratio, which can be compared to the Greek one. There is a risk that these countries will seek financial aid as well. We assume that this factor reins in the euro potential.