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Business/Finance See other Business/Finance Articles Title: Here's What Could Cause Confidence To Come Rushing Back Into The Dollar This was supposed to be a good year for the greenback. Back in January, the U.S. dollar appeared poised to strengthen on the back of an improving economy. But here we are in June, and things haven’t quite turned out that way. The U.S. economy contracted for the first time in three years last quarter, shrinking 1 percent. In the meantime, the dollar fell to its lowest level against the euro since 2011, hitting $1.39 on March 18 and hovering nearby ever since. “The market has lost confidence in the dollar’s ability to rally,” says Sean Shepley, head of Credit Suisse’s global macro product strategy. Can it be a strong finisher in 2014? Credit Suisse says yes, but is more selective with its recommendations for where to position dollar longs and sees two important conditions for the dollar to perform. The first, and most elementary, is that GDP growth must accelerate significantly in the second half of the year. And there’s hope on that front, as the economy is already showing signs of life after the frigid first quarter, as U.S. manufacturing activity picked up in May. The Institute for Supply Management reported that its index of national factory activity increased to 55.4 last month from 54.9 in April. Construction spending also rose in April, posting its highest level since 2009 amid an increase in government-funded projects. There’s more. A rapidly growing services sector and increased spending on non- durables should help drive GDP growth of 2 percent for the year, according to Credit Suisse. The U.S. also stands to benefit from stronger global growth, which is forecast to accelerate to 4 percent in the second half of the year from 2.5 percent in the first half. Growth alone won’t be enough to strengthen the currency, however. The second prerequisite for a rally, says Credit Suisse, is that investors start to have greater confidence that the Federal Reserve will begin to raise interest rates in 2015. On that front, things aren’t working in the dollar’s favor. Investors have actually moved in the opposite direction, lowering their expectations for a Federal Reserve hike as concerns spread about growth. Accordingly, the yield on the U.S. 10-year Treasury fell to 2.44 percent last week, its lowest level in almost a year. While yields regained some lost ground this week—the 10-year rose to 2.58 percent on June 3—they’re a long way from the 3 percent mark that Credit Suisse forecasts for the end of the second quarter. “Yields have fallen well below Credit Suisse’s fundamentally-based estimates of value,” Shepley says. “In part, this has been encouraged by the emphasis policy- makers have put on there being less upside for interest rates in this cycle than seen historically. But it also seems that investors seeking to protect their portfolios against the risk of a shock from the Fed have created a short base in the market. Short covering appears to have been one of the powerful factors driving yields down through the spring.” Still, yields should rise once investors start seeing consistently solid economic data in the U.S. In fact, Credit Suisse forecasts the U.S. 10-year yield to rise to 3.65 percent by the end of this year, and the 5-year yield to increase to 2.8 percent from 1.62 percent on June 3. The analysts also believe that the market is likely to shift its expectations for the Fed’s first rate hike (from 0 to 0.5%) from November 2015 to the second quarter. The release of May’s manufacturing data last week helped push the currency to the highest level against the euro in nearly two months, as the market anticipated a rate cut announced by the European Central Bank on June 5. Looser ECB monetary policy, says Credit Suisse, will help the dollar strengthen to $1.28 within the next year. More from The Financialist: The US Dollar: Waiting For Growth Bullish Times In The Art World Inequality’s Economic and Social Price Tag The Financialist is a digital magazine presented by Credit Suisse that looks at the trends and ideas that drive markets, businesses and economies. This article originally appeared at The Financialist. Copyright 2014. Follow The Financialist on Twitter. Read more: www.thefinancialist.com/the-u-s-dollar-waiting-for- growth/#ixzz34FcBup00 Post Comment Private Reply Ignore Thread
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