Spotlight Shines on the U.S. Dollar
The U.S. economy offered mostly positive signals last week. For example, the Conference Board’s Leading Economic Index rose in December for the third consecutive month. Investors believe this suggests the economy will remain strong during the coming months. In addition, reported corporate earnings for the fourth quarter generally have been above expectations.
That said, GDP growth in the fourth quarter came in at just 2.6%, which was below investors’ expectations.
The biggest development last week was a comment by the U.S. Treasury Secretary suggesting the U.S. favors a weak dollar relative to other world currencies. The Secretary’s comment—“A weaker dollar is good for trade”—received attention in large part because it was made at the high-profile World Economic Forum in Davos, Switzerland.
Some investors believe the comment may have been a maneuver to encourage global central banks to remain committed to accommodative monetary policies longer than they otherwise would—which would help keep interest rates lower for longer, and benefit equities.
Regardless, the U.S. dollar—which had already been trending lower for some time—fell to its lowest level in three years in the wake of the Secretary’s statement. (It later rose off those lows following a statement by the President that he wants to see a strong dollar.)
Internationally, the European Central Bank left its monetary policy unchanged and indicated interest rates would remain low for an extended period of time.
Global equity markets continued their march higher, in a relatively coordinated manner. Emerging markets led the way once again, on investor optimism that global economic growth will accelerate going forward. In the U.S., the retail and financials sectors were the top performers while utilities and industrials lagged. These results were driven largely by fourth-quarter earnings data from individual companies in these sectors rather than by sector-level developments.
In the fixed-income markets, global interest rates were largely unchanged for the week. This makes the high level of currency volatility especially interesting, because currency movements are often related to changes in the level of interest rates between countries (a concept called “interest rate parity”). High currency volatility in the absence of any change in interest rates means investors are placing more emphasis on other pieces of data, like central bank expectations or growth expectations, to value spot currency movements.