This article has been reproduced from the latest edition of the OFX Currency Review. To learn more about the US dollar and other major currencies and how your global business can prepare for the months ahead, download the full edition here.
As the economic slowdown in the US gathers pace, hopes for an end to the trade war between the two economic superpowers, the US and China, were dashed when talks aimed at ending the trade war collapsed in May.
In the time since, US president Donald Trump and China’s Xi Jinping at the G20 Summit in Osaka this June saw a trade truce and a temporary reprieve, however it isn’t a trade deal. Whether the two leaders come to an agreement to end the trade war remains to be seen, but the rest of the world will be watching closely.
Potential for a war with Iran looms
In other news, Trump is facing the possibility of an actual war if tensions between the US and Iran escalate. The US accused Iran of two attacks on two oil tankers in the Gulf of Oman in mid-June, after a video allegedly showing Iranian Revolutionary Guards removing an unexploded mine from the side of one of the tankers.
According to Jake Trask, FX Research Director for OFX, an escalation of tensions could be a boost for the US dollar. “Any global tensions will lead to trades which reduce the amount of risk businesses are taking in their currency exchange. As the US dollar is a ‘flight-to-safety’ currency, where investors will put funds when there are signs of trouble. This will naturally lead to inflows in USD which will give it support.
The dollar would most likely make modest gains against most currencies - with the exception of the Swiss franc and the yen, the traditional super safe havens.”
US economic slowdown continues
Consumer spending figures released in May suggest that they’re being more cautious with their money, with figures falling by 0.2% from the previous month. As retail spending boosts an economy, this does not spell good news.
Another critical measure was the Empire State Manufacturing Index survey, which came out as -8.6, the worst reading since May 2016. It showed that growth is reversing, employment is shrinking and future optimising declining the face of growing trade tensions.
House prices were also up 1.1% in Q1 across all 50 states and the District of Columbia, according to data from the Federal Housing Finance Agency (FHFA). According to Dr William Doerner, Supervisory Economist at the FHFA, “house prices have risen consistently over the last 31 quarters. Although price growth is still positive, the upward pace is softening across the country, especially among states with the largest supply of housing.”
How these changes impact the US dollar
Despite all the concerns, the US dollar has been performing relatively well against other currencies. It has held up against sterling throughout late May and early June but had eased slightly to sit at U$1.2694 at the time of writing.
Any business that is trading in US dollars - and many will, since it is the preferred currency for many transactions in places such as China and the Middle East - needs to be aware of any strengthening in the dollar that will reduce their buying power.
Luca Paolini, Chief Strategist at Pictet Asset Management says: “The US is an expensive stock market, and expensive currency and the country’s growth gap relative to the rest of our developed world is shrinking. For these reasons, US stocks will deliver returns that are only marginally above inflation over the next five years.”
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What to watch
Even though the US dollar is likely to strengthen further against emerging market currencies going forwards, the forecast is for the dollar to weaken further against the pound, to US$1.27 in Q3 and US$1.28 in Q4. This has much more to do with the pound strengthening than the dollar weakening, as the pound is currently very much undervalued.
This means US companies looking to keep their costs down should start talking to their currency specialist about locking in the current higher rates and to ensure you have the right strategy in place for your business.