On a three moving average, (3MMA) y/y comparison, the dollar was down 4.6% against the Broad Index. The dollar Broad Index was 98.89 on November 29th, it has traded in a range of 95.16, (September) to 103.13, (January) over the past 12 months. At 98.89, the dollar Broad Index is close to its year-to-date average of 98.58.
Figure 1 shows the track of the Broad Index from 2000 to present. After falling for nine consecutive months the U.S. Dollar Broad index has traded up slightly in each of the past two months.
Table 1 lists the values of the U.S. dollar measured in the currency of the 17 steel trading nations that we follow as of December 5th. 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.
Currencies gaining against the dollar include the Euro, +1.9%, the Korean Won, +2.4%, the Indian Rupee, (0.3%) the Taiwan Dollar, +0.5%, the Thailand Baht, +1.6% the Polish Zloty, +2.6%, United Kingdom’s Pound, +1.5%, the Mexican Peso, +2.6%, the Japanese Yen, +1.1%, the Canadian dollar, +1.5% the Brazilian Real, +0.5% and the South African Rand, 3.2%.
Four of the 17 countries’ currencies have lost value against the dollar over the past month ranging from -2.5% for the Turkish Lira to -0.1% for both the Chinese Yuan.
Figure 2 illustrates the history of the Japanese Yen against the dollar from 2000 to present and the year on year change. The Yen depreciated against the dollar in the period between 2013 and 2016 reaching 123 Yen/$. The Yen gained against the dollar in 2016 reaching a 102 Yen/$ in August 2016. The Yen then recovered, hitting 115 Yen/$ in January 2017. It has traded in a relatively narrow range (109 to 114) since then. Large swings in currency trade cause a substantial shift in trade patterns. When the Yen fell sharply in 2013, Japanese exports to the U.S. surged while U.S. exports to Japan tumbled. 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.
In the news today the dollar gained a day after posting its biggest daily rise in a week, as the currency continued to benefit from optimism surrounding U.S. tax reform. On Monday, the Republican-controlled House voted to go to conference with the Senate on tax legislation, setting up formal negotiations on the bill. The Republican-led Senate is expected to hold a similar conference vote later this week. Cutting taxes is expected to increase spending and drive inflation and U.S. interest rates higher, making the dollar more attractive. A falling dollar is good news for steel companies and manufacturers that export.
The market still expects the Fed to announce an interest rate hike in December and for the new Fed chairman Powell to embark on a path of gradual interest rate hikes in 2018. Powell is also expected to continue to pare back its massive balance sheet of Treasury notes and bonds.
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.