New Multi-Year Highs in the Dollar

April 28, 2022

The weighted DXY dollar index has advanced 0.7% on balance today and touched a 19-year high of 103.93, which constitutes an appreciation of 43.3 in April 2008 during the subprime mortgage financial crisis. Overnight dollar highs included a 20-year peak of 131.01 against the Japanese yen and $1.0471 versus the euro. Compared to closing levels yesterday, the dollar is currently up by 1.7% relative to the yen, 1.5% versus the Russian ruble, 1.1% vis-a-vis the kiwi, 0.8% against the Chinese yuan, 0.7% versus sterling, 0.5% against the Swiss franc, and Aussie dollar, 0.4% versus the euro and 0.2% relative to the Canadian dollar. The well-bid dollar reflects the Federal Reserve’s plans to attack inflation aggressively and a flight to safety response to Russia’s invasion of Ukraine.

The first estimate of U.S. economic growth in the first quarter of this year revealed a surprise 1.4% drop in real GDP versus analyst expectations of around a 1.0% expansion quarter-on-quarter when expressed at an annualized rate. Compared to the same quarter a year earlier, growth slowed to one-year low of 3.6% from 5.5% in the final quarter of 2021 and +12.2% last spring. Government spending, net foreign demand, and inventory changes exerted respective drags on the -1.4% GDP growth rate of 0.5, 3.2, and 0.8 percentage points. Quarterly increases of 2.7% in personal consumption and 9.2% in non-residential business investment, plus a 2.1% rise in residential investment despite rapidly rising mortgage rates provided silver linings around the surprise of seeing GDP drop for the first time since the second quarter of 2020.

The U.S. personal consumption price deflator accelerated to a 7.0% annualized pace and was 6.3% above its year-earlier level. That compares with an an-year rise of 1.8% in the first quarter of 2021. Excluding food and energy components, inflation measured by the PCE of 5.2% was up from 4.6% in 4Q 2021 and 1.7% in 1Q 2021.

U.S. share prices have opened on an up note of 0.5% in the DOW, 0.9% in the S&P 500, 1.3% in the Nasdaq. The German, French, Italian and British markets are up 0.9% or more, and equities closed 1.8%, 1.3%, 1.7% , 1.2% and 1.1% higher in Japan, Australia, Hong  Kong, India, and South Korea.

The ten-year U.S. Treasury yield had been showing a 5-basis point rise prior to the release of U.S. GDP but is now only up by a single basis point. Larger increases have occurred in comparable sovereign debt yields of 10 basis points in Italy, 9 bps in Germany and 8 bps in Spain and France. Prices for gold and oil are down modestly.

The Bank of Japan continues to contrast starkly with the Fed’s rapid transition from a patient strategy to a hurry-up offense against inflation. A  four hour 54 minute deliberation over two days by the BOJ policy board ended in unchanged policy settings despite marked revisions in projected inflation and growth. The meeting unveiled a quarterly update of the bank’s Outlook for Economic Activity and Prices. Projected growth in the fiscal year that began this month was lowered to 2.9% from 3.8% predicted three months ago, while core CPI inflation (excluding fresh food but not energy) was raised 0.8 percentage points to 1.9%. However, Governor Kuroda expressed doubt that inflation when energy is also excluded will go above 1.5%. He attributed inflation to “cost-push” factors that are likely to fade, and he accordingly does not anticipate conditions emerging anytime soon for considering an exit from the current stance known as quantitative and qualitative easing with yield curve control. Ahead of the meeting, speculation had arisen that Japan might undertake currency market intervention to stop the yen from depreciation, but Kuroda gave a mixed signal on that possibility. He favors a soft currency as good for the economy on balance but doesn’t want depreciation to snowball into a disorderly one-way bet that could depress the economy. The BOJ’s short-term interest rate has been negative 0.1% since early 2016, and a target of around zero percent for the 10-year JGB yield is being enforced by an open-ended promise to buy such assets at a yield of 0.25%.

The Swedish Riksbank announced a dramatic shift its policy. The repo rate was raised from zero percent to 0.25%, defying a promise made as recently as the prior meeting in February not to raise such until well into 2024. Large global uncertainties and rapidly rising CPI inflation across a broad front forced this change of heart that also includes forward guidance suggesting a front-loaded tightening that will lift the repo rate by almost a percentage point additionally over the coming year and to 1.8% by 2025. A released statement also announced an end to T-bill purchases by next month and a plan of balance sheet reduction through less than full reinvestment of maturing bond holdings. CPI inflation is now projected at 6.0% this year, double the prior forecast, 5.0% in 2023, 2.8% in 2024 and 2.3% in 2025.

Today’s batch of Japanese data included stronger-than-forecast retail sales last month (+2.0% versus February and +0.9% year-on-year); a greater-than-forecast 6.0% on-year rise of housing starts in March, down from 6.3% in the prior month; but also the largest on-year drop in construction orders (21.3%) in 20 months.

German consumer prices rose 0.8% in April, which pushed the 12-month rate of increase unexpectedly 0.1 percentage point higher to 7.4% from 2.3% in mid-2021. Not since 1981 has German inflation been as high as now.

Spanish CPI inflation slowed more sharply than forecast to a 3-month low of 8.4% in April from 9.8% in March.

South African PPI inflation accelerated further in March to 11.9%, highest since at least 2013.

Malaysian PPI inflation leaped 2.4% on month in March and was 11.6% above its year-earlier level.

An 18.0% quarter-0n-quarter surge in Australian export prices in the first quarter was the most since at least 1975. A 5.1% quarterly rise of import prices wasn’t shabby, either.

Several countries released confidence data today:

  • Portuguese business confidence rose to a 6-month high this month, but consumer confidence remained very weak.
  • Turkish economic sentiment dropped to a 10-month low.
  • Danish business confidence recovered to a 4-month high in April, but retail sales there recorded the largest on-year drop in March since at least 1996.
  • Swedish business confidence fell to a 3-month low in April, and consumer confidence bounced somewhat above March’s 155-month low.

New U.S. jobless insurance claims of 180k last month was at a 3-week low.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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