The monthly dollar Broad Index ended December at 96.68. The trading range over the year was between 95.16 (September) and 103.09, (January 2017) over the past 12 months. At 96.68, the dollar Broad Index is down a couple of points from to its year-to-date average of 98.43.
The Federal Reserve’s December ¼ point rate hike seemed to have no impact on the dollar’s exchange rate. Conventional wisdom would suggest that raising the interest rate would increase the dollars value.
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 January 2nd. 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 strengthening against the dollar include: the Euro, +1.2%, the Korean Won, +1.9%, the Indian Rupee,1.2%, the Taiwan Dollar, +1.0%, the Thailand Baht, +0.5% the Polish Zloty, +2.1%, United Kingdom’s Pound, +0.3%, the Japanese Pound, +0.1%, the Canadian dollar, +1.0% the Turkish lira, +3.1%, the Chinese Yuan +1.7% and South African Rand, 9.6%.
Three countries’ currencies lost value against the dollar over the past month, including: the Mexican Peso, -5.3%, the Brazilian Real, +0.5% and the Ukrainian Hryvnia, -4.0%.
Figure 2 illustrates the history of the UK pound against the dollar from 2000 to present and the year on year change. The pound depreciated against the dollar in the period between 2015 and 2016 reaching 0.805 $/pound in January 2017. Since then, the pound has appreciated against the dollar reaching 0.740 $/pound in January 2018. Prospects for the future value of the pound are in doubt since the UK decided to exit its membership the European Union. Most analysts expect that the value of the pound will depreciate over time as London becomes less of a major European financial center.
Closer to home, both the Canadian dollar and the Mexican Peso seem to be detecting the possible impact of the ongoing renegotiation of the NAFTA trade agreement. The Peso has devalued 7.6% over the past three months, while the Canadian dollar is off 0.5% over the same time-frame.
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 dropped on Tuesday to its lowest in more than three months, weighed down on the first trading day of 2018 by expectations of a slower pace of interest rate increases by the Federal Reserve amid a tepid U.S. inflation picture. The dollar’s decline extended its underperformance in 2017, which saw the greenback post its weakest annual performance in 14 years. On the other hand the euro has been on a tear especially since the second half of last year on optimism over a brightening euro zone economic picture.
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.