The Broad Index (also known as the trade-weighted US dollar index, is a measure of the value of the United States dollar relative to other world currencies), fell year on year, (y/y) for the second month in a row. The last time the broad index declined on a y/y basis was July 2014. On a three month y/y comparison, the dollar has fallen for six consecutive months. A falling dollar is good news for steel companies and manufacturers that export.
Table 1 lists the values of the US dollar measured in the currency of the 16 steel trading nations that we follow as of September 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.
Twelve of the 16 have gained against the dollar over the past month. All 16 have gained ground against the dollar over the past three months. Key currencies that have been gaining against the dollar over the past three months include: The Euro (+5.6%), the Canadian dollar (+7.0%), the Japanese Yen (+2.3%), the Turkish Lira (+1.9%), the United Kingdom Pound (+2.4%) and the Chinese Yuan (+4.4%).
Looked at over a one year period, the dollar has lost ground against 12 of the 16. Currencies that fell against the dollar include over a one year period include: Turkish Lira, (-15.8%), Japanese Yen, (-6.1%), South Korean Won, (-2.6%) and the United Kingdom Pound, (-1.8%).
On a five year comparison, the dollar was higher against all of the 16 currencies we monitor.
Figure 1 shows the track of the Broad Index from 2012 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 Broad index climbed rapidly from mid-2014 reaching a peak of 100.90 in January 2016. At this point the Broad index fell-back for a few months before climbing once again, establishing a new peak in December 2016 at 102.84 of this year. It has trended sharply downwards since then.
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 Broad Index from 1995 to present is 0.692, a fairly strong relationship.
The Euro/USD was in the headlines today as the Euro broke through the 1.20 barrier. The last time the Euro was greater than 1.20 was January 2015. The Euro is rising as investors react to European Central Bank president Mario Draghi’s warning that the currency’s recent volatility could hinder policymakers’ attempts to scale back its bond buying economic stimulus program. Mr. Draghi commented that the exchange rate is “not a policy target” but id very important for growth and inflation.
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.