Global Economic Weakness Drives Investors into Safe-Haven U.S. Dollar

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James Hyerczyk

Updated Sat, Dec 15, 2018, 10:08 PM

The U.S. Dollar was the big winner in the Forex market last week, but the move wasn’t driven by a strengthening U.S. economy, but rather a grim outlook for the global economy. U.S. inflation and retail data came in as expected and investors continued to position themselves ahead of this week’s Fed interest rate and monetary policy decisions. This helped underpin the greenback. However, it was geopolitical concerns over Brexit, and signs of a weakening economy in China and the Euro Zone that drove the dollar to a new high for the year.

Last week, March U.S. Dollar Index futures settled at 96.91, up 0.969 or +1.01%.

Limited Reaction to U.S. Data

Last week, the U.S. government reported on producer and consumer inflation, two factors the Fed will consider this week when deciding on future monetary policy. Investors also had the opportunity to respond to last month’s retail sales data.

Producer Prices Surprisingly Rise…

The Labor Department said on December 11 its producer price index for final demand edged up 0.1 percent last month after jumping 0.6 percent in October. In the 12 months through November, the PPI rose 2.5 percent slowing from October’s 2.9 percent surge. Economists had forecast the PPI to be unchanged in November and rise 2.5 percent on a year-on-year basis.

Traders said producer prices unexpectedly rose in November as increases in the costs for services offset a sharp decline for energy products, but the overall momentum in wholesale inflation appears to be slowing.

Core PPI increased 0.3 percent last month. It gained 0.2 percent in October. In the 12 months through November, the core PPI increased 2.8 percent, matching October’s gain.

But Consumer Prices Were Unchanged

The Labor Department said on December 12 that last month’s flat reading in its Consumer Price Index followed a 0.3 percent increase in October. It was the weakest reading in eight months. In the 12 months through November, the CPI rose 2.2 percent, slowing from October’s 2.5 percent rise.

Traders said U.S. consumer prices were unchanged in November because a sharp decline in the price of gasoline was offset by rising rents and healthcare costs.

Core CPI increased 0.2 percent, matching October’s gain. In the 12 months through November, the so-called core CPI increased 2.2 percent after climbing 2.1 percent in October.

Economists had forecast the CPI unchanged and the core CPI gaining 0.2 percent in November.

Consumer Spending Strengthening Economy

U.S. Retail Sales rose 0.2% in November, coming in better than the 0.1% forecast. October’s figure was revised higher to 1.1%. Core Retail Sales rose 0.2% as expected. However, October’s number was revised higher to 1.0%.

Analysts at Reuters said ‘U.S. consumer spending gathered momentum in November as households bought furniture, electronics and a range of other goods, which could further allay fears of a significant slowdown in the American economy even as the outlook overseas continued to darken.”

Problems With Global Economy

The U.S. Dollar Index rose to a 19-month high on Friday, as political and economic news outside the U.S. continued to drive up safe-haven demand for the greenback.

In the U.K., the British Pound tumbled as investors worried British Prime Minister Theresa May was struggling to secure assurances from the EU over her Brexit withdrawal deal.

The Chinese Yuan fell against the U.S. Dollar after data showed retail sales in the world’s second largest economy grew in November at their slowest pace since 2003 and industrial output rose the least in nearly three years. This news highlighted the negative effects of the on-going trade dispute between the United States and China on China’s economy.

The Euro lost 0.80% against the U.S. Dollar last week after European Central Bank President Mario Draghi announced lower growth forecasts. Draghi said 2018 growth in the Euro area was expected to be 1.9 percent rather than the 2.0 percent forecast in September.

“The risks surrounding the euro area growth outlook can still be assessed as broadly balanced. However, the balance of risk is moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” Draghi said.

In other news, IHS Markit’s Flash Composite Purchasing Managers’ Index slumped to 51.3, its weakest since November 2014, from a final November reading of 52.7.

Dollar’s Gains Limited

The dollar’s gains last week may have been limited by increased bets the Federal Reserve might reduce the number of interest rate hikes after a widely expected 25-basis point rate increase next week. The futures market implied traders saw an 82 percent chance the U.S. central bank would increase key short-term rates to 2.25 – 2.50 percent at its policy meeting next Tuesday and Wednesday, up from 79 percent last Thursday, according to CME Group’s FedWatch program.

This article was originally posted on FX Empire