Monthly Economic Review: U.S. Dollar

In today’s edition of my Monthly Economic Review, I’ve got a rundown of the latest reports from the U.S. economy to help answer the question on every forex trader’s mind these days: How long can these dollar rallies last?!

Based on how the Greenback has been going “Eat my dust!” to its forex rivals lately, it looks like the U.S. currency is poised to follow 2014: The Year of the Dollar with another blockbuster sequel. Let’s see if the economic data released so far this month shows that the odds are ever in the dollar’s favor:

Employment

When it comes to hiring, Uncle Sam is definitely on a roll! In fact, the U.S. may have already achieved full employment, as the country’s jobless rate dropped to 5.5% in February. That’s not so surprising, given how the U.S. has been consistently churning out stronger-than-expected employment change readings for the past six months!

Digging beneath the headline figures shows that hiring gains were seen across all sectors of the economy, reflecting how the labor market improvements are being felt throughout the entire country. However, wage growth has remained feeble and labor force participation has barely picked up, which means that there is still a significant amount of slack left.

Consumer Spending

With all these stellar gains in employment, one would think that consumer spending is also doing mighty fine. Well, that hasn’t been the case for the U.S. economy lately since the cold weather has dampened retail sales for three consecutive months already.

In February, headline retail sales fell by 0.6% instead of showing the projected 0.3% gain while core retail sales dropped by 0.1% versus the estimated 0.6% rise. This follows January’s 1.1% decline in core consumer spending and its 0.8% tumble in headline retail sales. As it turns out, snowy weather conditions led Americans to snuggle up on a cozy couch with a warm mug of cocoa at home instead of hitting the malls or dining out.

Bear in mind that consumer spending accounts for two-thirds of overall economic growth in the U.S., which suggests that the recent downturn in retail sales could take its toll on this quarter’s GDP.

Inflation

Falling price levels have been a huge concern for most economies lately and the U.S. ain’t exempt from this. Come to think of it, weak inflation is probably the only factor keeping the Fed from taking a more hawkish monetary policy stance!

Headline inflation fell by a sharper-than-expected 0.7% in January while core inflation chalked up a bleak 0.2% uptick, as consumer price levels have been dragged down by the oil price slump since last year. Annual CPI is expected to stay in the negative zone for the coming months, farther away from the Fed’s 2% inflation target.

Fed Monetary Policy

So far, Fed officials have been giving mixed signals and toying with forex traders’ feelings. While Fed Chairperson Janet Yellen has been trying to keep rate hike expectations in check in downplaying the odds of monetary policy tightening in June, other hawkish FOMC members such as Williams and Bullard have hinted that the central bank might increase interest rates sooner than expected.

At the end of the day though, there’s no denying that the U.S. is doing way better than the rest of its peers when it comes to economic performance and that the Fed is probably the only central bank moving closer to an interest rate hike. Take note that Yellen mentioned that they would be altering their forward guidance once they are strongly considering policy tightening – something that forex market participants will definitely be watching out for in the next FOMC statement.