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OUTLOOK – AUGUST/SEPTEMBER 2014
US Dollar has a heroic July
July has been a turning point for the dollar, allowing it to shed the ghosts of poor productivity that haunted
it earlier this year. With sterling weakening and the euro slipping further into potential deflation, the US dollar
emerged in July as the hero of the month. Consumer sentiment that did not reach expectations was quickly
forgotten as data revealed positivity in the labour market, with the US employment cost index rising at its
fastest rate in the second quarter of the year since September 2008. This helped the dollar to peak at
up to nine-month highs against the euro, while geopolitical events in Europe strengthened the US dollar’s
position as a safe haven asset.
Upwards and growing
The US economy grew by 4% in the second quarter of 2014 on the year, surpassing the 3% forecast by
the Commerce Department, and making up for lost time from when the economy shrank by 2.1% in the first
quarter of the year. However, it still has a lot of ground to catch up on, and will have to stand on its own two
feet following the completion of the US Federal Reserve’s quantitative easing programme later this year.
At the time of writing (12th August), mid-market rates were at $1/0.5932 and $1/€0.7482
Forecast
The US dollar is certainly the most ‘favoured’ of the three currencies at this moment in time, showing strength
across the board. This seems to be based on a recovering economy and its safe haven status.
The belief is that the US economy will continue to maintain its positive momentum over the coming months
and become more strident. This would be due to belief that the economy will flourish once quantitative easing
is removed, as well as to talk of increased interest rates. The question is whether the rate hike will happen
before or after an increase in the UK. This will be an important factor as to the movement in exchange rates
between the two countries.
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