US Consumer Confidence: Stimulus Exit Possibility Boosts Dollar
The US dollar appears to have added some strength as it strengthened on the back of positive economic data suggesting improving economic conditions in the US. Some of the positive news on the US economic front includes the reduction of monthly job losses to 11,000 in November, accompanied by initial claims for jobless benefits falling to their lowest level since September 2008. The slowdown in the decline in US home prices and some improvement in consumer confidence.
The latest US consumer confidence expectations index compiled by the Conference Board jumped to 75.6 in December from 70.3 in November. While consumer expectations appear to be rising, the current situation index, a gauge of how consumers are currently feeling, fell to 18.8 from 21.2 and was at its lowest level in 26 years. The current mindset of consumers appears to be a reflection of weak labor market conditions, where unemployment still appears to be a problem.
However, the index reveals that consumers are optimistic about the emerging economic scenario and seem to believe that the economy is improving. Improvements in economic conditions were also suggested by gains in manufacturing activity in the Chicago region. According to the report from the Chicago branch of the Institute for Supply Management, its purchasing managers’ index rose to a seasonally adjusted 60.0 in December from 56.1 in November.
The possibility of better economic conditions suggests the fact that the US Federal Reserve may start planning to withdraw the stimulus package and may start raising interest rates. Based on this assessment, currency traders expect the dollar to rise and have started to go long on the dollar, which seems to be the reason for the dollar’s current rally. It should be noted that the consolidation of the dollar reflects the improvement in economic conditions, which further leads to an increase in interest rates.
The current rise in the dollar is not representative of any rise caused by risk aversion in the dollar. Supporting this argument is a weakening in gold prices. Gold, which can be seen as another important tool for risk aversion, has become less in demand, suggesting that demand for the yellow metal is declining due to the improving US economy. Gold futures are down almost 11% from their high price of $1,227.50 an ounce in early December. Previously, demand for the yellow metal had increased as the metal was bought as a hedge against inflation and a safe haven from the financial crisis or as an alternative to the dollar.
Although the dollar showed a bullish movement, it was based on little trading and some important operations could have affected its movement. The upward movement could also have been the result of the closing of accounts at the end of the year that required the purchase of dollars. Despite the note of caution, the dollar’s bullish direction seems to be taking hold based on expectations of better economic performance and some key indicators suggest it. The dollar’s performance in 2010 is likely to depend on how the US economy shapes up and how quickly it overcomes recessionary trends. All indicators suggest a better year ahead.