The US dollar (USD) has fallen for six consecutive months against the Broad Index, (a trade weighted basket of currencies). The June 2017 Broad index value was 97.77, down 1.3% from the May’s reading and down 2.8% compared to 3 months ago.
Table 1 lists the values of the USD measured in the currency of the 17 steel trading nations on July 19th, 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. Most steel trading currencies (12 of 17), gained against the dollar on both one and 3 month comparisons.
Over the past 3 months, the Polish Zloty gained the most, up 8.9%. The Zloty gained 3.4% month on month, (m/m). The next biggest gain was by the Euro, up 8.3%, over 3 months and 2.4% m/m. As a point of reference, the Euro bottomed out at 1.04 in early January. The Eurozone economies, especially Germany are running hot at the same time the Trump administrations’ agenda is struggling to pass promised legislation, (healthcare bill failed yesterday). Closer to home, the Mexican Peso gained 2.3% and 6.2% vs. one and 3 months ago, while the Canadian dollar was up 4.6% on the month and 5.6% over 3 months.
The Chinese Yuan gained 1.1% against the buck, and was up 2.2% compared to 3 months ago. The Yuan was down 1.2% compared to one year ago. 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.
The Turkish Lira fell 0.8% against the dollar over one month, 5.4% over 3 months but remains down 14.6% y/y. The United Kingdom’s pound sterling gained 2.4% over one month, and was up 5.0% compared to 3 months past. Over a one year period, the pound was down 1.3%. The Japanese Yen was the only currency that lost value against the U.S. dollar for each of 1, 3 and 12 month comparisons, off -0.5%, -0.8% and -5.2% respectfully.
Figure 2 compares the Broad Index and net long product imports from 2011 to present. The relationship is far from perfect with a correlation coefficient of 0.678, largely because the month over month long product import rate is quite volatile. 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. Successful trade actions is one major reason, another is stronger internal demand in some countries. The declining dollar will also dampen the rate of imports coming into U.S. ports should the dollar’s woes continue. Conversely U.S. exports of steel and other manufactured goods should rise.
Looking forward many analysts continue to expect that the U.S. dollar will rebound in the second half of the year. A pick-up inflation is anticipated which will prompt further interest rate hikes by the FED.
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.