The US dollar (USD) continues to advance against a trade weighted basket of currencies known as the Broad Index. The February 2017 Broad index value was 101.33 down 1.4% month on month (m/m) but up 1.9% over 12 months and up 22.0% from a level of 83.04 where it stood five years ago. The FED announced a quarter point interest rate hike on March 15th for the second time in three months, this time to a range between 0.75% and 1.0%, is finally moving toward the end of its nine-year-old economic stimulus campaign, which began in the depths of the financial crisis.
The rate hike did not move the Broad Index higher since it was already priced in. It is highly probable that the dollar rally will continue into 2017 as a series of interest rate hikes is expected thanks to a stronger economy, increased government spending and possible trade policy initiatives.
Figure 1 compares the Broad Index and net long product imports from 2011 to present. From 2011 to 2016, as the dollar moved higher so did imports since this meant more revenue in the exporter’s home currency. This relationship began to erode in 2016 and has continue so far this year. Successful trade actions is one major reason, another is stronger internal demand in some countries. A recent China Metals Weekly article reported that demand for rebar and wire rod in its home market together with environmental production curtailments combined to reduce exports of these products.
Table 1 lists the values of the USD measured in the currency of the 17 steel trading nations on March 22nd, it reports the changes in five year, one year, three months and one month for each currency and is color coded to indicate strengthening of the dollar in green and weakening in red. We regard strengthening of the US Dollar as negative and weakening as positive because the effect on net imports.
Most currencies strengthened against the USD over the past month, the exceptions were the Canadian dollar (-1.9%), the Chinese Yuan (-0.5%), and the Saudi Arabia Riyal (-0.1%). Fourteen of the 17 countries also strengthened against the USD over the past 3 months as well. A notable exception was the Turkish Lira which plummeted 22.1%. Many of the countries listed in Table 1 suffered double and even triple digit depreciation against the USD over a five year period. Ukraine tops the list with 237% depreciation over 5 years followed by Turkey at 102%. Closer to home the Mexico Peso has eroded 49.3% while the Canadian dollar has suffered a 34.2% devaluation against the USD over the last 5 years.
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.