US Economic Performance: Upbeat Economic News Supports the Dollar

There appears to be a clear green signal in the US economy, as suggested by the US Federal Reserve. Reflecting better economic performance, the US dollar tightened, despite the Fed leaving interest rates unchanged. interest, which have remained close to zero for some time.

However, the Fed appears ready to implement an exit policy when needed. The exit policy will help curb the excess liquidity that has been injected into the system and that can turn inflationary. Although the Fed may be ready to implement an exit policy, it still continues with its stance of having an extended low interest rate regime. Therefore, the exit policy may initially start with the withdrawal of the extraordinary support that has been extended followed by a tightening of the interest rate regime.

News of better economic performance and the possibility of an exit policy seems to have boosted sentiment towards the dollar and investors seem to be showing interest in it again. According to the Fed’s statement, the labor market seems to be heading for a better performance. Improved employment conditions are an important key to the economic performance of the US, which is largely a consumer-driven economy. Better employment conditions mean higher disposable income and better consumer demand, which can get the US economy moving again.

Higher disposable income would also lead to inflationary pressures and it is believed that the Fed is closely monitoring the labor market and would implement exit policy based on improved labor market conditions. News on housing starts was also positive, rising 8.9% in November. Building permits also showed a positive trend, standing at 584,000 in November at an annualized rate versus 551,000 in October.

Mortgage applications also showed positive growth. US consumer prices also showed some signs of tightening with a 0.4% rise in November. These indicators, seen together with positive GDP growth in the last quarter, suggest that the US economy is gradually shedding the pains of recession and heading for a recovery.

It should be noted that the strengthening of the dollar occurred in the absence of changes in interest rates. Typically, an upward interest rate revision attracts foreign funds into US Treasury investments and the dollar gets a boost. However, this time, the interest rate remained unchanged, and yet the dollar received a boost.

This clearly implies that the dollar’s gain this time is due to the intrinsic strength that the US economy has started to show. The dollar tightening is also unrelated to risk aversion gains and is therefore indicative of intrinsic gains.

The key to the dollar’s long-term strength will be the exit policy and how the Fed manages to reduce the massive amount of liquidity it has pumped into the economy as part of various rescue packages.

Excess liquidity, with increased consumer demand, will generate inflationary pressures, which may begin to erode the value of the dollar. Therefore, the Fed must be very alert to various economic indicators and time its exit policy well to maintain the value of the dollar.