Top 10 economic indicators for the US dollar in 2019 and forecast

US dollar 2019 forecast - ten indicators
Image: adapted from Pixabay.

For US companies trading conditions for the international sales division will be determined by economic demand conditions, relative US dollar exchange rates and the overall business environment determined in part by the regulatory environment.

The strength of overseas demand will be an important factor for companies which are looking to sell in international markets.

The dollar’s level is a key element in determining costs and profit margins for both importers and exporters. The strength of the dollar will also be crucial in determining competitiveness and the ability to compete in global markets, especially in the manufacturing sector.

If the US currency is notably weak in global markets, exporters will be in a stronger positon to gain market share.  A strong dollar would lead to tough conditions for exporters, but importers will gain a significant cost advantage.

The value of the US dollar will be determined by both US and international factors. It is important to remember that the value of global currency pairs is determined by changes in relative fundamentals rather than just absolute trends.

Even if the US economy is performing relatively well, the dollar will tend to lose ground if global economies are performing even better.

The release schedule for major indicators can be seen on the economic calendar

US employment data

The monthly US employment data is the most important data release for the US and global markets. There is data on the change in employment outside the farm sector, together with the unemployment rate and change in average earnings.

This release is considered the most important barometer of underlying strength in the economy. Strong data maintains confidence in the US growth outlook and will also tend to increase expectations that the Federal Reserve will move to raise interest rates which tends to strengthen the dollar.

Federal Reserve policy

The Federal Reserve controls the level of short-term interest rates in the economy, although it is important to note that there is no direct control of longer-term interest rates even though policy changes will impact rates across the yield curve.

If the Federal Reserve raises interest rates, there will tend to be upward pressure on the dollar while a cut in rates tends to weaken the US currency.

The Federal Reserve policy decisions are a crucial element in determining underlying dollar direction.

US consumer prices (CPI)

Inflation trends within the US are very important in setting monetary policy direction with the Federal Reserve, along with other central banks, having a mandate to target inflation. In the Fed’s case it targets a rate of around 2%.

If inflation moves above this level, there is pressure for the Fed to tighten policy in order to reduce inflationary pressure and this tends to strengthen the currency.

Low inflation will increase pressure for a cut in interest rates which tends to weaken the dollar.

US GDP

The US GDP data is a benchmark indicator of growth trends in the economy even though there are important doubts surrounding accuracy of the data, especially given that there are substantial revisions. In this context, headline data can paint a misleading picture.

US elections

Much of the market attention is often focussed on economic data releases, although political developments also play a very important role. The domestic and international framework in areas such as trade policy can have a crucial role in the ability to trade successfully overseas.

There are also important implications from changes in taxation policy and any imposition of tariffs or import duties.

The outcomes of US Presidential and Congressional elections are therefore important in setting the overall framework for US trade policy.

Given the importance of Mexican and Canadian markets for US companies, US policy towards NAFTA is a key focus.

Canada interest rate decision

Given the importance of bilateral trade between the US and Canada, the USD/CAD exchange rate is also vital for US businesses. In this context, the Bank of Canada rate decisions have an important impact on the Canadian dollar’s value.

ECB rate decision

Looking at the global economy, the most important institution is the European Central Bank (ECB).  The ECB sets interest rates for the Euro-zone and is a key determinant of the Euro’s value in global currency markets.

If the ECB raises interest rates, the Euro will tend to strengthen which will have a beneficial impact on US companies looking to export to the Euro-zone area. If, on the other hand, the ECB cuts interest rates and runs a very loose monetary policy, the Euro is liable to weaken which will make it more difficult for US exporters to compete.

In similar fashion, the monetary policy decisions of the Bank of England and Bank of Japan will have important implications for the value of Sterling and the Japanese yen.

China trade

China’s economy has a very important impact on the global economy and developments within China will also have a key impact on the wider outlook for Asia.

Conditions within China will have an increasingly important impact on US businesses which engage in overseas trade.

Chinese GDP data does command market attention, although there are important doubts surrounding its reliability.  In this context, the trade data is a more important indicator of underlying trends in the Chinese economy. Strength in exports and imports are an important indicator of robust growth in both the Chinese and global economy.

Baltic Dry Bulk Index

This is not a headline indicator by any means, but is watched closely by professionals. The index measures the global cost of chartering ships to transport dry bulk cargoes. When there is strong demand in the global economy with robust trade growth, there will be strong demand for shipping which tends to put upward pressure on prices.

When global growth is weak, demand for shipping will be weak which will tend to put downward pressure on prices. The data provides important insights into the strength of global demand.

Further details on the Baltic Dry Bulk Index

Big mac index

The ‘Big Mac’ index produced by the Economist measures the cost in local currency and dollar terms of a standard McDonalds hamburger. Given the universal nature of the product, the cost gives a useful indicator of relative exchange rates and purchasing power parity. This gives important evidence on whether a currency is substantially undervalued or overvalued compared to the dollar.

As well as the actual degree of undervaluation or overvaluation, changes in the positon give important intelligence surrounding competitiveness.

From a US company’s point of view, there will be value in targeting exports to countries where the exchange rate is overvalued while looking to source imports from countries where the currency is undervalued.

Further details on the Big Mac index

Forecast on the US dollar for the rest of 2019

Out of all the things I listed here in this article one thing will have more impact on the dollar in 2019. That is the USA-China trade. It is the single component that will have significant impact on the state of USA economy, the stock market, and the dollar. Treasury secretary Mnuchin has mentioned that deal is underway.

Another significant issue for the dollar in 2018 was the regime’s stability. Whenever it was speculated that Trump will be impeached, the dollar sunk. In 2019, the Muller reported will be released in the coming days and it is already known it is going to have a positive impact on Trump’s standing (Yahoo! named the initial results a “victory lap for Trump”).

Hence, it seems like the USA market will rally throughout the year, and the USA dollar will only strengthen.