Greenback Hits 4-month Low Against A Basket of Currencies
Girvan Lambert | May 15, 2015 02:10AM ET
The mighty greenback has been on a tear lately, but over the last couple of months, its momentum has been reversed and it has now actually started losing serious ground not only against the euro, but against a basket of other currencies as well. On Thursday, the USD hit its 4-month low against the EUR, as a plethora of disappointing news about the US economy rattled it thoroughly. The main driver of the massive drop (which saw the EUR/USD pair climb above the 1.4 mark at one point), was the release of data concerning retail sales, which were shown to be stagnant in April, contrary to the expectations of the majority of economists, who had forecast a 0.2% gain.
The impact of the data was much further reaching than the retail sector though, essentially shaking confidence in the projected interest rate-increase by the Federal Reserve. Most experts expect the first USD interest rate increase in a decade in September, but the weak data the US economy has been posting lately has somewhat undermined those expectations. In a clear illustration of the greenback's weakness across the board, the Bloomberg Dollar Spot Index, which tracks the performance of the currency against the currencies of 10 major trading partners, dropped some 0.2 percent. This latest setback came on the tail of another drop of some 0.7 percent on Wednesday, which was in fact the largest drop of the index since March 23. The dollar dropped 1.2 percent against the euro on Wednesday.
In the past month, it's obvious the dollar has been in something of a freefall, losing 6.5 percent against the common currency. Various indicators are all pointing to the fact that the US economy is weakening and with the Fed's interest rate hike out of the picture for the near future, there aren't any factors validating a possible reversal of the current bearish outlook.
Compounding the fundamental problems caused by the slowing of the US economy for the dollar, bad news has been few and far between around the euro. The combined GDP of the euroarea rose by 0.4 percent according to data released on Wednesday, and Telefonica (MADRID:TEF), Europe's second largest phone company revealed revenues exceeding the expectations of the analysts - pointing to the strengthening of the Spanish economy. All these positive developments came in addition to a general lack of bad news concerning the problem-economy of Greece.
Over the short term, the drop of the greenback is expected to continue, although according to some analysts, the 1.3-1.4 threshold represents a potential point of reversal for the EUR/USD pair. The resistance has indeed been tested today and the pair is slowly but surely inching back towards 1.4, after an initial retracement.
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For the long-term however, experts seem firmly convinced the euro will drop back to the 1.04 level by the end of the year, as the greenback is poised to reclaim its shining star status. Indeed, the Fed continues to remain committed to the idea of the interest-rate increase, while the ECB is still firmly on-track with its aggressive stimulus program. Most analysts recently surveyed by Bloomberg have confirmed this long-term bullish sentiment on the greenback.
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