The latest US Conference Board consumer confidence fell to the lowest level since February, the headline reading dropping to 109.3, below expectations for 114.5. as the spread of the Delta variant continued to dampen optimism,. While spending intentions for homes, autos and major appliances continued to pullback. The Conference Board noted in light of back to back declines indicate that consumers have grown much more cautious over short-term growth prospects and are likely to curtail spending going forward.
The reaction in the USD has been muted with the data largely playing second fiddle to the current market narrative. As I mentioned earlier, corporate month end has typically coincided with USD strength.
The most recent US Convention Board client confidence fell to the bottom degree since February, the headline studying dropping to 109.3, beneath expectations for 114.5. because the unfold of the Delta variant continued to dampen optimism,. Whereas spending intentions for properties, autos and main home equipment continued to pullback. The Convention Board famous in gentle of again to again declines point out that buyers have grown far more cautious over short-term progress prospects and are prone to curtail spending going ahead.
The response within the USD has been muted with the info largely taking part in second fiddle to the present market narrative. As I discussed earlier, company month finish has sometimes coincided with USD power
3 Factors That Drive the U.S. Dollar
The 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.
On the other hand, American consumption that results in the importing of goods and services from other countries causes dollars to flow out of the country. If our imports are greater than our exports, we will have a deficit in our current account.1 With a strong economy, a country can attract foreign capital to offset the trade deficit. That allows the U.S. to continue its role as the consumption engine that fuels all of the world economies, even though it's a debtor nation that borrows this money to consume.2
This also allows other countries to export to the U.S. and keep their own economies growing.
From a currency trading standpoint, when it comes to taking a position in the dollar, the trader needs to assess these different factors that affect the value of the dollar to try to determine a direction or trend
Factors Affecting Dollar Value
The methodology of determining dollar value trades can be divided into three groups as follows:
Supply and demand factors
Sentiment and market psychology
Below we'll take a look at each group individually and then see how they work together as a unit.
Supply Vs. Demand for Driving Dollar Value
When the U.S. exports products or services, it creates a demand for dollars because customers need to pay for goods and services in dollars. Therefore they will have to convert their local currency into dollars by selling their own currency to buy dollars to make the payment. In addition, when the U.S. government or large American corporations issue bonds to raise capital that is then purchased by foreign investors, those payments will also have to be made in dollars. This also applies to the purchase of U.S. corporate stocks from non-U.S. investors, requiring the foreign investor to sell their currency to buy dollars to purchase those stocks.
These examples show how the U.S. creates more demand for dollars, and that in turn puts pressure on the supply of dollars, increasing the value of the dollar relative to the currencies being sold to buy dollars. On top of this, the U.S. dollar is considered a safe haven during times of global economic uncertainty, so the demand for dollars can often persist despite fluctuations in the performance of the U.S. economy.
Sentiment and Market Psychology of Dollar Value
In the case that the U.S. economy weakens and consumption slows due to increasing unemployment, for instance, the U.S. is confronted with the possibility of a sell-off, which could come in the form of returning the cash from the sale of bonds or stocks in order to return to their local currency. When foreign investors buy back their local currency, it has a dampening effect on the dollar.
Technical Factors that Impact the Dollar
Traders are tasked with gauging whether the supply of dollars will be greater or less than the demand for dollars. To help us determine this, we need to pay attention to any news or events that may impact the dollar's value. This includes the release of various government statistics, such as payroll data, GDP data, and other economic information that can help us to determine whether there is strength or weakness in the economy.
In addition, we need to incorporate the views of larger players in the market, such as investment banks and asset management firms, to determine the general economic sentiment. Sentiment will often drive the market rather than the economic fundamentals of supply and demand. To add to this mix of prognostication, traders are tasked with analyzing historical patterns generated by seasonal factors such as support and resistance levels and technical indicators. Many traders believe that these patterns are cyclical and can be used to predict future price movements.
Bringing Factors Together
Traders typically adopt some combination methods we outlined above to make their buy or sell decisions. The art of trading exists in stacking the odds—in the form of congruence in the three methodologies—in your favor and building an edge. If the probability of being correct is high, the trader will assume the risk of entering the market and managing their hypothesis accordingly.
An Example of a Dollar Value Shift
The economic conditions during the recession that began in 2007 forced the U.S. government to play an unprecedented role in the economy. Since economic growth was receding as a result of the large deleveraging of financial assets, the government had to take up the slack by increasing spending and propping up the economy.4 The purpose of government spending was to create jobs so that the consumer could earn money and increase consumption, thereby fueling the growth needed to support economic growth.
The government took this position at the expense of an increasing deficit and national debt. In short, the government essentially printed money and sold government bonds to foreign governments and investors to increase the supply of dollars, resulting in the currency's depreciation.5
The Bottom Line
Outside of paying close attention to market sentiment and technical factors such as government data, it may be helpful for a trader to keep an eye on the Dollar Index chart to provide an overview of how the dollar fares against the other currencies in the index. A trader can develop a big picture sense of the flow of dollars and form an insight on how best to select profitable trading positions by watching the patterns on the chart and as mentioned above, listening to the major fundamental factors that affect supply and demand.
U.S. consumer confidence fell to a six-month low in August as worries about soaring COVID-19 infections and higher inflation dimmed the outlook for the economy.
The survey from the Conference Board on Tuesday showed consumers less inclined to buy a home and big-ticket items like motor vehicles and major household appliances over the next six months, supporting the view that consumer spending will cool in the third quarter after two straight quarters of robust growth.
Still, more consumers planned to go on vacation, indicating a rotation in spending from goods to services was underway as economic activity continues to normalize following the upheaval caused by the coronavirus pandemic. Increased spending on services, which account for the bulk of economic activity, should keep a floor under consumer spending.
"The report does raise the warning flag that if the pandemic worsens, and given the continued unwillingness of many to get vaccinated that is a real possibility, we could see people stashing away funds just in case," said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. "We could see growth moderate faster than expected."
The Conference Board's consumer confidence index dropped to a reading of 113.8 this month, the lowest since February, from 125.1 in July. Economists polled by Reuters had forecast the index falling to 124.0. The cutoff for the survey was Aug. 25, before the killing of 13 service members in Afghanistan and Hurricane Ida slammed Louisiana.
The measure, which places more emphasis on the labor market, held up well compared to other surveys. The University of Michigan's survey of consumers showed sentiment tumbling to near decade lows in August because of rising prices for goods like food and gasoline, as well as the resurgence in COVID-19 cases that has been driven by the Delta variant of the coronavirus.
"While the resurgence of COVID-19 and inflation concerns have dampened confidence, it is too soon to conclude this decline will result in consumers significantly curtailing their spending in the months ahead," said Lynn Franco, senior director of economic indicators at the Conference Board in Washington.
Consumers' inflation expectations over the next 12 months rose to 6.8% from 6.6% last month. There are signs, however, that price pressures have peaked, with data last week showing the Federal Reserve's preferred inflation measure posting its smallest gain in five months in July.