US: Global growth concerns remain in focus – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has remained on a firmer footing overnight strengthening further against Asian currencies.

Key Quotes

“The Asian dollar index has fallen back to support from its 200-day moving average at around 107.20 and a break below would likely encourage accelerated weakness in the near-term.

The recent rebound in the US dollar has not been driven by a pick-up in Fed rate expectations. The US interest rate market remains unconvinced that the Fed will even raise rates again this year given weak global growth. Boston Fed President Rosengren and Kansas City Fed President George who are both voters on the FOMC this year both signalled yesterday that they support a gradual further tightening of monetary policy if the incoming economic data continue to be consistent with gradual improvement in labour markets and inflation moving closer to their target.

Boston Fed President Rosengren repeated his belief that the market remains too pessimistic about the fundamental strength of the US economy, and the likelihood of removing monetary policy accommodation is higher than is currently priced into financial markets based on current data. His comments carry more weight as he is viewed towards the more dovish spectrum of FOMC participants.

If the Fed resumes raising rates in the third quarter as we expect, it should begin to offer more support for the US dollar. For the Fed to resume rate hikes it will require building evidence that the US economy is regaining upward momentum after the weak start to the year. Boston Fed President Rosengren stated that he expects the US economy to expand by above its long-term potential in Q2 which he estimates at only 1.75%.

A return to above potential growth would be consistent with further declines in the unemployment rate which should reinforce confidence that inflation will return to the Fed’s target. The release today of the latest retail sales report for April will be watched closely to assess if consumer spending has strengthened. Caution amongst households who increased savings in Q1 dampened consumer spending. More solid core retail sales growth is expected in April.”