The US dollar (USD) has retreated for three weeks in a row against a basket of currencies known as the Broad Index. The April 2017 Broad index value was 99.84, down 0.8% from the March’s reading and the first month as a two digit number after recording a string of five triple digit values.
Over the past three months the index has fell back 2.9%. Compared to five years ago, the Broad index it is up 19.4% and it’s up 3.9% year on year (y/y). It is probable that the US$ bull market will resume later this year as a series of interest rate hikes are expected.
Table 1 lists the values of the USD measured in the currency of the 17 steel trading nations on May 8th, 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 Canadian dollar fell against the US$ for each time comparison, off 1.1% in a month, 2.4% over three months and by 10.0% on a y/y basis. The Canadian dollar will likely continue to weaken the coming months, as the Federal Reserve is expected to continue increasing rates while the Bank of Canada is bound to stay put, according to top ranked currency forecasters.
The Chinese Yuan gained 0.6% against the buck, was flat vs. three months ago and was down 5.2% compared to one year ago. The Euro gained in both near term metrics, up 3.8% over one month and up 3.5% compared to three months ago. It was down 3.7% y/y. The Turkish Lira gained 5.0% against the dollar over one month, 2.3% over three months but was down 20.4% y/y. Several currencies have rallied against the US$ for all three time references including: India’s Rupee, Poland’s Zloty, Taiwan’s Tai Dollar and Thailand’s Baht. The South African Rand appreciated the most against the US$ y/y, up 12.4%, followed closed by the Russian Ruble +11.9% and the Brazilian Real, +10.0%. The currency that lost the most value compared to the US$ y/y was the Turkish Lira, -20.4%, the next largest decline was by the United Kingdom’s pound sterling, which fell 11.8% y/y.
Figure 1 compares the Broad Index and net long product imports from 2011 to present. From 2011 to 2016, as the dollar moved higher and so did imports since this meant more revenue in the exporter’s home currency. This relationship began to erode in 2016 and has continued so far in 2017. Successful trade actions is one major reason, another is stronger internal demand in some countries. We have witnessed this divergence in the past. The relationship has always corrected after a period of a few weeks to as long as six months.
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.