The US dollar (USD) continues to advance against a basket of currencies known as the Broad Index. The January 2017 Broad index value was 102.82, up 1.4% from the 101.40 posting of January 2016. Over the past three months the index has surged by 4.9%. The USD bull market will likely continue into 2017 as a series of interest rate hikes is expected thanks to increased government spending and possible trade policy initiatives.
Table 1 lists the values of the USD measured in the currency of the 17 steel trading nations on February 20th, it reports the changes in, one year, three months and one month for each currency and is color coded to indicate strengthening of the dollar in red and weakening in green. We regard strengthening of the US Dollar as negative and weakening as positive because the effect on net imports.
The Euro continued to weaken against the USD falling 4.5% over 12 months and 2.7% over the past three months. The divergence in monetary policies between the US ad Germany (Germany has a major impact on the strength of the Euro), which supports the dollar. There is a wide spread on government bond yield between the two countries (widest in a decade), together with the expectation of a series of rate hikes by the FED it is probable that the Euro will continue to weaken possible achieving parody with the USD in the near term.
The dollar ended 2016 at a 14-year high and has advanced nearly 24% against a broad basket of currencies from its recent low on January 2013. Further tightening of US monetary policy is expected over the balance of the year which is one of the major factors behind the dollar’s strength. Higher interest rates, resulting from expectations of stronger growth, make a currency more attractive for investors to hold. The Fed is one of the few major central banks on course to continue raising interest rates this year. Most other major central banks, are still easing rates and in some cases, actually keeping short-term interest rates in negative territory. The Trump administration’s talk of expansionary fiscal policy, trade tariffs and tax reforms is putting upward pressure on the USD. The president has proposed investing $1 trillion in infrastructure over the next 10 years, and at this stage, both parties seem to support such spending. Such an initiative would boost economic growth by creating more jobs and more spending, spurring demand in the short run.
At Gerdau, we keep a close eye on the currency market because it has a profound impact on both the import and export of raw materials, semi-finished and finished steel. A strengthening USD is a “double-edged sword”, as it makes the US market more attractive other countries to export to the US and conversely imposes strong head-winds for the US to export its products to other nations.