Keep Your Eye on the Greenback
03/27/2015 12:01 am EST
MoneyShow's Jim Jubak explains why the recent economic data has boosted the US dollar and what that means to the markets in the weeks ahead.
For the week ahead, watch the dollar. It looks like a patch of weakness in the dollar which came after the Fed said that they were going to watch the data and probably not raise in June but raise in September. The dollar weakened against the euro and that's because the dollar's been climbing on the anticipation that the Fed is going to start to raise interest rates and that will draw money into the United States, and blah, blah, blah, blah. The euro has been going up against the dollar. The dollar has been falling in general, not a whole lot but we're talking about moving up from the euro being 106, 105, 104 to up near $1.10 or so.
That all came to a halt on March 24, and what you need to know going forward, what you need to look for going forward, is you need to understand this dynamic. What stopped the euro rising against dollar which stopped the fall of the dollar was good economic news in the United States that brings the probability of a Fed first rate increase closer. What we had was decent inflation numbers, 0.2% increase in core inflation, so not so high that the Fed needs to do anything about rates but solidly inflation and actually, kind of low so it would make the Fed want to do something about getting inflation higher. You had a manufacturing number, the Purchasing Managers Index, Manufacturing Index, which at 50; anything below 50 is a sign that the sector is slowing. Anything about 50 is a sign the sector's increasing. Expectations were that it would go up maybe, but it already is pretty strong last month at 55.1. It went up to 55.3. It continues to strengthen in the manufacturing sector.
The big surprise this morning was new home sales which came in at a much stronger level than expected blowing out through last month as well as expectations. The housing sector is therefore strong. That's a key part of what the Fed watches about setting rates. You don't want to move rates higher if it's going to cause a problem in the housing sector by raising mortgage rates. All of those things drove the dollar higher. We're looking today at Euro/dollar exchange rate instead of 1-11, 1-10, we're back down to 1-9. I anticipate it probably sliding a little further depending on what happens in Europe with Greece and the Greek exit from the euro.
Going forward, this is what to watch. It's clear right now that any time that the US economy looks stronger, the dollar is going to rise because people anticipate this brings the Fed closer to its first interest rate increase and vice versa. If you're looking to buy European stocks, my recommendation is to hedge because I think the Euro is headed to parody, one euro to one dollar or even lower over the next say 18 months. This is what you're watching, more strength in US economy, stronger dollar. Of course, a stronger dollar over time cuts into corporate earnings. It'll be interesting to see what this does for first quarter earnings which should start to be reported in early April.