Surprise Increase in US Retail Spending Leads to Weaker Dollar

us dollar

Despite being the world’s most robust economy, 2020 was a trying time for the US. With more than 787,000 more Americans filing for unemployment, it came as a big surprise for investors that the forecasted growth of consumer spending of 1.1% was eclipsed by the actual spend growth of 5.3%. 

Arthur Idiatulin, a Forex Trader and Financial Practitioner for Tickmill notes that “the retail sales reading tends to underestimate growth, since in early January, American households received stimulus checks from the government, the stimulating effect of which was difficult to calculate.”

This additional pandemic relief money from the government suggests a pick-up in economic activity after being restrained by another surge in Covid-19 infections last year. The largest gain in retail sales in seven months reported by the Commerce Department on Wednesday was across the board, and ended three straight monthly decreases. The acceleration in activity at the start of 2021 was evident in other data showing strong growth in production and prices at factories last month.

While strong growth in the retail sales is a clear signal that the world’s largest economy is growing well, it does mean that the theme of yield hunting remains valid, which has negative implications for the USD.

The US economy’s performance is at the heart of the decision to buy or sell dollars. A strong economy will attract investment from all over the world due to the perceived safety and the ability to achieve an acceptable rate of return on investment. Since investors always seek out the highest yield that is predictable or “safe,” an increase in investment, particularly from abroad, creates a strong capital account and a resulting high demand for dollars. However, the stimulus checks and resultant growth in the retail sector is somewhat of a false economy. 

Currently, stock index futures in the US are trading in moderately negative area, so all in all the demand or USD today gradually weakens. EURUSD is likely to consolidate in the 1.20-1.21 channel with a probable test of the 1.21 level. Lack of progress on vaccination pace in Europe is the main obstacle to appreciation of the European currency, but as soon as the situation in this direction starts to improve, the European currency should be able to resume strengthening against the USD.

While most economists see the year off to a slow start, they expect the pace to pick up later in the year as vaccination efforts spread and the grip of Covid-19 fades.

One of the main concerns for the recovery has become inflation, however, senior Federal Reserve officials have shrugged off concerns that further fiscal stimulus might generate an unhealthy jump in inflations this year.

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