Dollar's Summer Performance Was Best Since 1995
September 2, 2008
The summer season in currency trading is book-ended by the U.S. Memorial Day and Labor Day holidays. In this middle of three annual seasons, the U.S. currency rose 11.9% against the Australian dollar and by a similar amount against the kiwi. It advanced 8.6% against sterling, 7.5% against the Swiss franc, 7.4% against the euro and Canadian dollar and 5.3% against the yen. One has to go back 13 summers to find one in which the dollar even came close to matching this year’s twin gains against the euro and yen. Not once in the intervening twelve years did the dollar in fact rise as much as 1% against both of its rivals between the Memorial and Labor Day weekends. Last summer, the dollar firmed 1.4% against the euro but fell 4.7% against the yen. The dollar was buoyed over the past three months by sharply revised perceptions of 2008 growth among G7 economies. By coincidence, the OECD released growth forecasts that revise projections made in June and exemplify why the dollar did so well. I cannot recall a time when the projected U.S. growth was revised upward but growth everywhere else downward to such a degree in such a short period of time. The old and new forecasts for 2008 growth are shown below.
| 2008 Growth-f | New | Old |
| United States | 1.8% | 1.2% |
| Euroland | 1.3% | 1.7% |
| Japan | 1.2% | 1.7% |
| Britain | 1.2% | 1.8% |
| Canada | 0.8% | 1.2% |
The dollar in the past has exhibited a bias toward weakness between Labor Day and the end of December. Against the D-mark and/or euro, the U.S. currency fell in this third and final season in 24 of the past 32 years and posted an average movement, including times when it rose, of -2.7% including -2.8% since the mark was melted with other European currency to form the euro in 1999. Among the last five years, the dollar rose against the euro between Labor Day and yearend only in 2005. The dollar also fell against the yen in the autumn season during 2007, 2006, 2004, and 2003, and it recorded a mean loss in this period since 1980 of 2.3% but of only -0.8% since 1999. This year the dollar has opened the autumn season on a firming note, extending the bid-momentum shown during the summer. From Friday closing levels before Labor Day, the dollar has advanced on balance by 2.7% against the Australian dollar, 2.1% against sterling, 2.0% against the kiwi, 1.0% against the euro, and 0.6% against the Canadian dollar and Swiss franc. The OECD now predicts U.S. and Euroland GDP growth of less than 1% at a seasonally adjusted annual rate in both 3Q08 and 4Q08, a contraction of British GDP in both of those quarters, and positive GDP growth in Japan of 2.4% saar in 3Q and then 1.4% in the final quarter. Canadian growth is penciled in at 0.8% in 3Q, improving to 2.0% in 4Q08. These estimates do not replicate the stark contrast between the United States and everybody else in 1H08. If the U.S. continues to perform both better than expected and better than anticipated relative to growth elsewhere, the dollar is likely to end the year at better levels than it closed last Friday. If U.S. growth fails to outperform, the dollar correction will not necessarily stall out. Currencies respond to many factors and in particular to meaningful surprises, like the disparity of growth earlier this year. A different surprise could arise to capture the imagination of currency investors in coming months.
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