Four Reasons Why The Dollar Strength Could Last

The US dollar continued to rise after the Fed statement last week. Yesterday, the upward trend continued after Automatic Data Processing (ADP) released the private payrolls for September. The data was upbeat. In the month, the economy created more than 232K jobs which were higher than the expected 187K. Soon afterwards, the Institute of Supply Management (ISM) released PMI data for the service sector. The data showed that the PMI rose to a seven-year high. This is important because the US economy is largely dependent on the service sector. In addition, orders and prices rose. Therefore, here are the four reasons why the dollar could remain strong.

Strong US economy

Last week, the Labour Department released the final data for the second quarter GDP. The data confirmed that the US economy improved by 4.2%. This was above the previous estimates of a 4.0% growth. The unemployment rate has fallen to below 4%, job vacancies are now more than the number of applicants, the manufacturing industry is seeing a resurgence, and all the main metrics are improving. While growth is forecasted to continue, there are concerns that the rate will reduce. Therefore, regardless of how the Q3 data shows, the economy will continue to do well.

Weak Growth Overseas

As the US economy is powering on all cylinders, growth in the overseas market has stalled. In Europe, the economy has improved but there are signs that the growth is not broad based. In Japan, the country’s growth too has not impacted wages and inflation. The same is true in New Zealand, South Korea, Australia, China, and UK. The divergence in the economic growth in the developed world will help power the dollar. Similarly, the Emerging Markets are not at ease. Just yesterday, the Indian Rupee fell to a 20-year low. Other EM countries like Indonesia, Brazil, and Argentina too are not doing well.

Central Bank Divergence

There is a divergence in the opinion of central banks. The Fed has continued to sound hawkish about interest rate hikes. In the monetary policy statement released last week, the bank said that it will continue to hike rates. A rate hike is expected in December and three more in 2019. At the same time, the other central banks have not followed suit. The Bank of Japan has guided to status quo. The ECB has indicated that it will likely hike in September. The Bank of England has put question marks on the next hikes. At the same time, the RBA and RBNZ have also guided to lower interest rates for longer.