Key Points:
The strong cycle of the US dollar index is expected to reach an inflection point amidst a slowing US economy, but this does not necessarily imply a significant devaluation of the US dollar index. It is essential to monitor the relative changes in growth and monetary policy of other developed economies, as well as the impact of the US elections.
Since late July 2024, the US dollar index has weakened rapidly, particularly in early August when it dropped from 105 to 102 within a week. The primary reason behind this is the slowdown in the US economy and the rising expectations for interest rate cuts by the Federal Reserve.
Firstly, there has been a significant slowdown in new job additions in the US, with an increase in the unemployment rate. In July, non-farm employment positions increased by 114,000, lower than the revised 179,000 in June. Wages have also slowed down significantly, with average hourly earnings growing by 3.6% year-over-year, lower than the 3.9% in June. The unemployment rate rose to 4.3% in July, higher than the expected 4.1%. The current US unemployment rate has increased by 0.6% since its low point in 2024, triggering the "Sam Rule" based on unemployment rate predictions of a recession, which has sparked concerns about an economic downturn.
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Secondly, consumption continues to weaken, and consumer confidence has fallen. In June, US retail sales decreased by 0.1% month-on-month, indicating increased pressure on consumer spending. Among these, spending on automobiles and gasoline were the largest downward drivers, with decreases of 2.3% and 3% respectively. The uncertainty of the election has also weakened the economic outlook, with the US Consumer Confidence Index falling. The final reading of the University of Michigan Consumer Confidence Index in July was 66.4, the lowest since November 2023.
Furthermore, the real estate market sales are sluggish. Since the beginning of 2022, US mortgage interest rates have doubled. Under the impact of high interest rates, the first-time home buying and replacement needs of ordinary people have been forced to be shelved, the supply of the second-hand housing market is short, and the housing market has fallen into a situation of falling volume and rising prices. As of the end of June 2024, the US housing price index was 1.5 times that of the end of 2019, but the sales of existing homes decreased from 5.53 million to 3.89 million.
Lastly, manufacturing activity continues to contract. The growth of core capital goods orders in the manufacturing industry has almost stopped, with a year-on-year growth rate of only 0.9% from January to June 2024. Data released by the Institute for Supply Management (ISM) shows that the US manufacturing PMI index fell from 48.5 in June to 46.8 in July, the lowest in nearly eight months. After the Chicago PMI fell to 35.4 in May (reaching the lowest since May 2020), it remained below the boom-or-bust line in June and July (47.4, 45.3). The slowdown in economic activity in the Chicago area to some extent indicates that US manufacturing and even broader economic activity may face pressure.
Against the backdrop of a series of economic indicators slowing down, US inflation has also shown further cooling. The US Consumer Price Index (CPI) fell by 0.1% month-on-month in June, marking the first decrease since May 2020. The CPI and core CPI year-on-year rates fell to 3.0% and 3.3% respectively, both lower than expected. All categories generally showed a slowdown, such as a 2% month-on-month decrease in energy prices, a 1.5% decrease in used cars, a 1.3% decrease in transportation, and a decrease from 0.5% to 0.2% in medical services. Rent decreased by 0.2% month-on-month, breaking the upward trend of more than 0.4% for four consecutive months, indicating further weakening of inflationary pressures. At the monetary policy meeting in July, Federal Reserve Chairman Powell affirmed the progress of inflation retreat and stated that the Federal Reserve may announce an interest rate cut at the September meeting.
Overall, the US economy is currently slowing down, and the Federal Reserve is expected to start the path of interest rate cuts. Against this backdrop, the strong cycle of the US dollar index has faced an inflection point. However, this does not necessarily mean that the US dollar index will depreciate significantly. It is necessary to pay attention to the relative changes in growth and monetary policy of other developed economies and the impact of the US elections.
Firstly, the growth of developed economies such as the Eurozone and the UK is relatively sluggish. Since 2024, inflation in major European economies has improved significantly, with Germany and France's CPI stable at around 2.5% year-on-year, and the UK's CPI has fallen to 2% year-on-year. However, economic growth in Europe is faltering. For example, the Eurozone manufacturing PMI in July was only 45.6% (with Germany at 42.6%), remaining below the boom-or-bust line for 25 consecutive months. The Eurozone industrial production index also continues to be in a negative growth range. The UK Labour government has recently emphasized the dire fiscal situation of the UK on several occasions, with Prime Minister Keir Starmer bluntly stating that the UK is "bankrupt."Secondly, apart from the Bank of Japan's interest rate hike, other major developed economies' central banks have started to cut interest rates before the Federal Reserve. The Bank of Canada and the European Central Bank announced rate cuts in June, while the Bank of England and the Reserve Bank of New Zealand announced rate cuts in August. Meanwhile, the Federal Reserve has been relatively cautious, with its interest rate decisions dependent on economic data performance. If there is not enough economic data to indicate that the US economy is entering a recession, the Federal Reserve will not easily make consecutive large-scale interest rate cuts.
Thirdly, the uncertainty surrounding the US presidential election may exacerbate dollar fluctuations. On one hand, although Trump advocates for a "weak dollar" to reduce trade deficits and support the repatriation of manufacturing, the "weak dollar" itself is somewhat contradictory to his policy of strengthening trade barriers. Imposing additional tariffs could raise the inflation level in the United States, which is not conducive to the realization of a "weak dollar." On the other hand, after Biden withdrew from the race, Vice President Harris took over, and the polls quickly caught up with Trump, making the outlook for the US presidential election unpredictable and potentially intensifying market volatility.
Overall, under the slowdown of the US economy, the strong cycle of the US dollar index is expected to reach an inflection point. However, the factors influencing the future trend of the US dollar index are becoming more complex, and the trend remains uncertain.