Market Matters Blog

U.S. Dollar Takes a Break

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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The U.S. dollar index is still above its 50-day average, but the bullish narrative has changed this week and the buying frenzy has ended... at least for now. (DTN chart)

What a difference a month can make. On Mar. 10, I wrote about a U.S. dollar index that was spiraling higher, fed by news of a growing U.S. economy that was anticipating its first hike in interest rates since 2006.* At the same time, Europe's economies struggled with low growth, Greece's debt problems, and pockets of high unemployment.

Money chases opportunity and the obvious contrast sent the dollar index to a high of 100.33 on Mar. 13, a 26% gain in just under nine months. For U.S. grain prices, the dollar's rise was bearish news, especially in the month of March when little else was happening to entertain traders.

Just this week, we have finally seen a change in the dollar's bullish narrative, the first fundamental challenge to higher prices since last summer. The European Central Bank began its program of quantitative easing less than a month ago, but some encouraging signs have already emerged.

On Mar. 31, Eurostat reported that the unemployment rate for the Euro area improved from 11.4% to 11.3% in February.** It is a small change, but in the right direction, and was also the lowest rate since May of 2012. In Germany, where fourth quarter GDP growth was the sixth best of 28 European nations, the number of unemployed dropped to 2.932 million in March, the lowest total since the two Germanys reunited 24 years ago.***

At the same time Europe is showing glimmers of improvement, the outlook for the U.S. economy is softening. Concerns about first-quarter growth found ammunition on Apr. 1 when the Institute of Supply Management's index of U.S. manufacturing dropped from 52.9 to 51.5 in March, the same day that a different manufacturing index for the Eurozone hit its highest level in ten months.

Adding to the bearish arguments, the Atlanta Federal Reserve said Thursday that it expects no GDP growth for the U.S. in the first quarter of 2015, down from its earlier estimate of 1.9% annualized growth in early February.**** It blamed the slowdown on winter weather and a more expensive U.S. dollar.

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As I write this on Friday morning, the U.S. dollar index is down .84 after the U.S. Labor Department said that the U.S. unemployment rate stayed at 5.5% in March. Non-farm payrolls, however, only increased by 126,000 in March, much less than expected reported RTTNews.com -- a statistic that reinforces concerns over the economy's latest hiccup.

The overall fundamental outlook still favors a higher U.S. dollar as it remains likely that the U.S. economy will increase interest rates ahead of Europe. However, this week's change in the narrative has deflated the buying frenzy that we witnessed in early March and is giving grain prices bullish relief. For grains, the dollar's bearish influence is fading and the focus is coming back to weather, where the increased attention is well-deserved.

*"Seven Months and Counting" posted Mar. 10, 2015 on DTN.

** Eurostat news release, Mar. 31, 2015, "Euro area unemployment rate at 11.3%" at:

http://ec.europa.eu/…

*** "German unemployment slides below 3 million" posted Mar. 31, 2015 by Deutsche Welle at:

http://www.dw.de/…

**** "Atlanta Fed cuts growth forecast to zero" by Heather Long, Apr. 2, 2015 at:

http://money.cnn.com/…

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(KM)

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