This past Wednesday traders and economists cheered the latest rise of the dollar to a new 10 month high against the Euro. As many celebrate the coming week coloring eggs or eating matzah, the debate should circle around whether this signifies U.S. economic recovery or are other nations simply beginning to deteriorate at a faster rate than the U.S?
The dollar strengthening 1.4% to the Euro, 1.13% to the British Pound, and 2.08% to the Japanese Yen cause many to tout the U.S economy is back on track amidst a rise in durable goods orders (excluding autos) of 0.9% in February versus a 1% drop in January.
However, these rises could be attributed not to U.S. recovery, but a flight to safety over the anxiety of a global economic landscape trending downward. Further, Portugal’s sovereign credit rating has been lowered by Fitch indicating a likelihood that other Euro Zone countries may also experience a downgrade. Not to place Portugal as the only egg in the basket this Easter, Ireland, Greece, Italy and Spain have demonstrated distress and it could be argued that many investors have turned to the U.S. dollar for safe haven.
Understanding the basis of the dollar strengthening helps predict how quickly investors can expect an economic turnaround.
We can assume the strengthening of currency bodes well for U.S. corporations as consumer surveys indicate, price points are a major concern for distributors due to recession affected cash flows. A stronger currency should lower foreign purchasing and manufacturing costs. A lower price point could then stimulate spending and have a positive effect on the economy.
However, the ISM Index shows manufacturing supply chain issues continue to exist, delaying the economic turnaround despite the strengthening dollar Retail inventories (index of 37 this past February versus 32 in January) are low depicting nervousness over a turnaround and a lack of cash to build up inventories. Anticipate inventory improvement this month, however, this is not an overnight endeavor. Manufacturers have increased production, to build their inventories in expectation of new order influx from the end consumer and lower prices could point towards consumer willingness to increase demand.
The bottom line is that a new 10 month high against the Euro maybe good news but understand that it may not be entirely a result of our economic improvement but the trend downwards amongst our global neighbors. We, therefore, continue to hold our premise that there will be several market slips along the way to an economic recovery.