The US dollar (USD) has fallen for 5 consecutive weeks against the Broad Index, (a trade weighted basket of currencies). The May 2017 Broad index value was 99.34, down 0.4% from the April’s reading and down 2.1% compared to 3 months ago.
On a year over year (y/y) comparison, the dollar was up, 2.2% and referencing 5 years ago, the Broad index it is up 17.1%. Most analysts expect the US dollar reverse course later this year as two interest rate hikes are anticipated.
Table 1 lists the values of the USD measured in the currency of the 17 steel trading nations on June 6th, it reports the changes in, one year, 3 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. Most currencies gained against the dollar over both one and 3 month comparisons. The South African Rand gained the most, up 4.8% month on month (m/m). The next biggest gain was by the Polish Zloty, up 2.7% m/m and up 6.2% vs. 3 months ago. Closer to home, the Mexican Peso gained 2.5% and 2.8% vs. one and 3 months ago, while the Canadian dollar was up 1.2% on the month but was down 1.1% over 3 months and by 5.5% y/y.
The Chinese Yuan gained 0.9% against the buck, and was up 1.4% compared to 3 months ago and was down 5.2% compared to one year ago. On a y/y comparison the Yuan was down 3.4%. Figure 1 shows the history from 2009 to present. Yuan per $US is shown as the blue line read on the left-hand Y axis. Percent change y/y is represented by the green bars, read off the right-hand Y axis. After a strong run of gains, the Yuan has fallen for 6 months in a row on a y/y basis.
The Euro gained in both near term metrics, up 2.3% over one month and up 4.3% compared to 3 months ago. It was down 0.8% y/y. The Turkish Lira gained 0.8% against the dollar over one month, 1.9% over 3 months but remains down 22.1% y/y. The United Kingdom’s pound sterling, which fell0.7% over one month, but was up 3.7% compared to 3 months past. Over a one year period, the pound has lost 14.9% of its value against the $US.
Figure 2 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.