How much longer for dollar strength?
Despite the plethora of data that has come out recently, one thing that has occasioned very little comment is the outlook for U.S. exports. Exports are generally not a big factor in the subset of companies involved in the ISM survey, but the plunge in export orders to 34.5 suggests that U.S. exports, hitherto a support in an otherwise collapsing economy, could be in big trouble as well.
U.S. November ISM Non-Manufacturing Index: Summary
Nov. Oct. Sept. Aug. July June May April March 6-mo Avg 2008 2008 2008 2008 2008 2008 2008 2008 2008 Composite Index 37.3 44.4 50.2 50.6 49.5 48.2 51.7 52 49.6 46.7 Export Orders* 34.5 50 50.5 44.5 47.5 52 54 48.5 55 46.5 Import Orders* 40 52 47.5 46 49 50.5 48 50 54.5 47.5 U.S. November ISM Non-Manufacturing Index: Summary, December 3, 2008, Bloomberg
Note that the export order index is falling faster than the import order index. The recent strength of the dollar is clearly having an impact. The combination of these two sub indices of the manufacturing ISM shows the substantial positive differential of exports over imports has disappeared. The same sub indices for the non-manufacturing ISM may be telling us once again that the whole trade improvement that was such a positive for the U.S. economy in recent quarters is about to disappear and may even reverse. This ominously echoes what happened in the wake of the Asian Financial Crisis in 1997/98, where a flight into the dollar from the Asian currencies triggered a huge deterioration in the U.S. current account and a further hollowing out of the country’s manufacturing base. With Detroit already on the verge of collapse, the decline of the Korean won from 900 to 1400 massively improves Korea’s competitiveness in the U.S. auto market. If dollar strength persists, then no bailout or no bailout, GM, Ford and Chrysler are toast.
You’re showing the non-mftg index data, but stating it is from the manufacturing index. While service (non-mftg) exports are indeed falling faster than imports, the 12 month average is still positive. On the other hand, the manufacturers index actually shows the reverse (i.e. imports falling faster, likely due to the crash in commodity prices – see attached charts). The fact that the U.S. is using a significantly smaller “supply of dollars” for imported oil, is a definite positive for the dollar, though this doesn’t improve the ‘net export’ figure in GDP as units is all that matters…
Given all of this and the economic problems associated with global markets, I am not nearly as large a dollar bear as some. I definitely feel there will be weakening of the relative value of a dollar (i.e. inflation) at some point due to an oversupply, but I expect this to happen across all currencies. Thus, the relative weakness of the dollar (which matters for exchange rates) won’t be nearly as weak in my opinion. HOWEVER, I due think some / a lot of the move we’ve seen over the past few months was largely due to the deleveraging of global investments and will rebound in the coming months.
@Jake:
I am back from Holiday and wanted to step in as it seems Marshall is away. I see the error there regarding the index and will look to correct that.
As for the dollar, currencies are very difficult to call over the short-term because they don’t really act according to the fundamentals (even over the medium-term). I think the Euro was way overvalued at 1.60 and was destined for a correction. However, now we are seeing the U.S. flooding the market with money and it seems that this must eventually be dollar bearish.
You were saying that a lot of the dollar move looks to be related to deleveraging. Interestingly, I see the same in the recent moves in treasury rates. This seems to be a burgeoning bubble that is very supportive of the dollar. However, when this bubble bursts I fear we could get a whipsawing, much as we did after the commodities bubble burst.
If you put a gun to my head and asked me were the dollar should be, I actually would say it seems about right here. But, I do see weakness based on expected events (i.e. a reflation play and quantitative easing by the Fed).
Any thoughts there?