The Broad (or trade weighted US dollar index), Index fell year on year, (-1.2%) for the first time in three years. The monthly Broad Index recorded a value of 96.77 for July, down in each of the last six months from its high of 102.78 in January.
Table 1 lists the values of the US dollar measured in the currency of the 17 steel trading nations on August 7th. 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. The US dollar has declined in value against the most of the seventeen steel trading nations that we track. Twelve of the 17 have gained against the dollar over the past three months, 9 over the past month. Looked at over a one year period, the dollar has lost ground against 11 of the 17. The dollar has gained against all of these countries but two (South Korean Won and the Saud Arabia, Riyal), when looked at vs. five years ago.
Key currencies that have been gaining against the buck include: The Euro gained +2.0% against the dollar over one month and +6.6% over three months; the Canadian dollar, (+0.0% and 7.3%); the Japanese Yen (+1.2%, +1.7%); the Turkish Lira (-0.1%, +0.4%) and the Chinese Yuan (0.4%, 2.1%).
Figure 1 shows the track of the Broad Index from 2000 to present. The Index value is read off the left hand Y axis, the year on year percentage change on the right Y axis. The index traded in a narrow range from 2012 through mid-2014 at which point it began a rapid rise peaking in January 2017. Volumes of imported goods to include long product steel are heavily influenced by currency exchange. The correlation coefficient between net long product imports and the road Index from 1995 to present is 0.692, a fairly strong relationship.
Currency traders keep a keen eye-on inflation in an effort to predict future interest rate hikes. Higher interest rates attract both domestic and foreign capital searching for a higher return. This results in an increasing demand for US dollars. When demand rises on a fixed supply, the price rises. At this time, the FED has been very cautious on any public discloser on the timing of futures interest rate hikes. Key reports to watch which shed light on inflationary pressures include: Trade Balance, Non-farm Payroll Employment, Gross Domestic Product, Retail Sales and Industrial Production.
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.