Growth Trends Justify Dollar's Summer Correction
August 28, 2008
U.S. growth of 3.3% at a seasonally adjusted annual rate (saar) last quarter towered above annualized growth of 0.2% saar in Britain, -0.8% saar in the euro area and -2.4% saar in Japan. The biggest growth thrust came from net exports, which accounted for more than 93% of the rise in GDP, a sign that the dollar had become very competitive. Euroland’s nominal seasonally adjusted current account had swung from a EUR 10.8 billion surplus in 2H07 at an annualize rate to a EUR 50.0 billion deficit in 1H08 on a similar basis, reinforcing the perception of an overvalued euro.
Distortions amplified the growth disparity last quarter. U.S. growth was stimulated by tax rebates and is likely to have dropped sharply in the third quarter to something more akin to the 0.9% pace of 1Q08, with much less forward thrust from net exports. In Europe, a mild winter buoyed growth in the first quarter but caused second-quarter results to compare weakly with 1Q. Whereas U.S. growth improved sharply, both Europe and Japan had weak quarters after surprisingly brisk first-quarter rates of expansion. In comparing these economies, it makes sense, as ECB officials have been insisting, to consider the first half as a whole, not as two quarterly parts. When this is done, the U.S. advantage remains significant, however. U.S. real GDP increased 2.1% at an annualized rate between 4Q07 and 2Q08, twice as much as Euroland growth in that period of 1.0% saar and five times greater than growth in both Japan and Britain, each of which amounted to 0.4% saar.
In the three months since May 28th, a period when investors were absorbing the reality of much stronger-than-expected U.S. growth and much weaker-than-anticipated growth elsewhere as well as reacting to the breaking of the commodity price fever, the dollar has advanced 7.5% against sterling, 5.8% against the euro, and 3.9% against the yen. How much further the dollar recovers in the coming three months will be influenced heavily by the width, if any, in the growth gap. All signs point to continuing soft activity in Europe and Japan, where prospects for additional quarters of negative growth are quite credible. The U.S., however, will probably achieve deteriorating growth. For one thing, the labor market is weakening significantly. New jobless claims averaged 440,250 in the four weeks to August 23rd, up from 393.0K in the previous four weeks. August is the third month in the last six in which such jumped sharply. Weekly jobless claims had increased to 376.75K in the four weeks to April 5 from 348.4K in the four weeks to March 6 and had risen to 390.5K in the four weeks to June 28th from 368.5K5K in the four weeks to May 31. If U.S. growth worsens but growth elsewhere remains poor though not worse and if central bank interest rates are not cut in Europe or Japan before November, lessening impetus will exist for a continuing dollar rally. This scenario represents the consensus of present expectations. The dollar will in fact be most sensitized to discrepancies from this set of expectations. For example, if the pundits are again way too pessimistic about U.S. growth and if growth elsewhere deteriorates at an intensifying rate, a clear case would exist for the dollar to extend its cyclical rally.
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