This isn’t to say that the greenback is on the verge of a charge that will enhance its value against the euro, yen and other major currencies. However, the activity in the foreign exchange markets of late suggests that the knee-jerk interpretation of any and all data as dollar-negative — a view that held sway for months — is no longer operative.
The euro reached a high of $1.6038 on July 15. Since then, it has fallen back, dropping to $1.5591. It’s not exactly a massive move, and doesn’t even push the euro/dollar out of its recent trading range. But it is at the lower end of this trading range, and the reaction in the foreign exchange market to Thursday’s economic data shows that investors are predisposed to think more positively about the dollar.
“You are starting to get a more forgiving attitude to the dollar,” says Joseph Trevisani, chief market strategist at FX Solutions, who says investors are more likely to look at positive developments, “rather than ignoring it and only focusing on the bad news.”
Thursday’s report on U.S. economic growth was worse than expected, with an overall growth rate of 1.9%, and downward revisions to previous quarters. However, inventory reduction played a significant part in this sluggish figure, and “when that’s the case it implies there will be an inventory build in the future which will add to GDP,” says Robert Lynch, head of currency strategy for HSBC Americas.
The dollar fell after the 8:30 a.m. ET release of the figure, which was coupled with a worse-than-expected report on weekly jobless claims. However, a better-than-expected report on Chicago-area manufacturing conditions brought buyers back into the market. In previous months, sellers may have continued to hold sway, but the emerging thinking is that the U.S. economy may have seen its worst, while European economies continue to struggle. Still, the jury is out.
“When markets change they find statistical proof they need to justify their ideas,” says Mr. Trevisani. “I think you’re seeing some of that but nobody is truly convinced yet. No doubt, the European economies are slowing vis-à-vis the U.S. economy, and there’s no doubt the U.S. economy hasn’t collapsed. But neither view has changed the overall scenario yet.”
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