During the first quarter of the year, the major story in the Forex market was one of dollar strength, but we have seen a significant reversal of fortunes for the US dollar in the month just gone.
By Peter Martin
Friday, May 1, 2015
April turned out to be the worst month for the currency in four years, based on the performance of the dollar index. US economic data for 2015 has been disappointingly weak, but for the first portion of the year the market seemed happy to disregard the data as merely a consequence of poor weather. The general consensus was that the economy would bounce back once the winter receded, but there have been few signs of this in April, leading to concerns that the cause of the economic softness may be more deep rooted than previously thought.
The Fed maintained in its post-FOMC statement on Wednesday that the effects of a slowdown have been partly caused by temporary factors and as we saw with Thursday’s jobless claims report, the US labor market has indeed improved in recent weeks, but this doesn’t seem to be tying in with advancement in other key areas of the economy. The major measures of consumer attitudes have been divided: the University of Michigan’s consumer sentiment index rose in April, while the Consumer Confidence Index, plunged from 101.3 in March to 95.2 in April, with a marked decline in the expectations component.
US manufacturing is another area showing weakness. There have already been signals of weakness in April from regional surveys conducted by various Federal Reserve banks and a slowing in growth appears to be confirmed by the final reading of Markit’s nationwide manufacturing PMI, which fell to 54.1 from a preliminary reading of 54.2 and from 55.7 at the end of March. Some of the weakness appears to be linked to the strength of the dollar, which put downward pressure on prices and depressed export orders. 54.1 marks a three-month low in the index, with production an area of particular weakness: production expanded at its slowest rate since last year.
UK manufacturing also slowed noticeably this month. The UK manufacturing PMI dropped to 51.9 in April, coming in much lower than expected, down from March’s downwardly-revised level of 54.0. This is the lowest reading for this indicator in seven months, with weakness centered around overseas demand, while input costs were also down. The strength of the pound will have been a contributing factor in these areas. The weakening in the pound that followed this report should naturally help to ease this issue: GBP/USD fell 0.84% to 1.5222, while GBP/EUR fell 1.14% to 1.3523.
The broad weakening in the dollar contrasts with the recent resurgence of the euro. The euro has surged in the latter part of this week, rising 0.33% on Friday to 1.1262 and reaching as high as 1.1285 earlier in the session, the highest rate seen in the currency pair since February. To put that into context, the ECB began its huge program of quantitative easing in March, meaning the euro has recovered the losses amassed in the wake of those stimulus measures.
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