PureFX

Why Strong US Data Can Cause Dollar Weakness On The Foreign Exchange Market

Fri 3rd February 2012

Often when you speak to a foreign exchange specialist about the rates, you can expect to hear something like:

“The pound has gained against the euro this morning. It’s all because of strong UK retail sales, causing market confidence in sterling. In addition, there have been reports that Portugal needs a second aid package from the EU. That’s helping the pound too, because it’s causing nervousness about the euro.”

This reflects the fact that, for most countries, the equation is simple: strong economic performance means a strong currency. If the news from a nation is good, you can expect its currency to gain in value against others.

Look for instance at Australia. Since the financial crash in 2007-8, the Australian dollar has rocketed in value, in large part because demand for its commodities from China has shielded it from recession. For instance, against the British pound, the Australian dollar has gained 42.00% since Feb 2007!

There is however one exception to this rule.

Unlike other currencies, the United States dollar has a marked tendency to nosedive when good US economic data hits the newswire. For example, reports concerning the US job market upturn (a massive 200 thousand jobs were created in the US last month) could not have been less beneficial for the US dollar.

So why is this? And perhaps more importantly, how can you use it to your advantage when changing currencies?

The main reason the US dollar weakens is because the US remains the backbone of the global economy. In spite of the rise of China, and the ascendency of the euro as an alternative reserve currency, the US remains our main engine. It is also (therefore) the chief safe haven: the place people put their money when things go bad.

For instance, concerns that the Eurozone might not be there in 12 months have been of huge value to the US dollar in this respect. Investors have fled to the US currency as a strong mast to cleave to during this storm. This looks set to continue.

But of course this is a double edged sword. In turn, reports that the US job market has recovered (for instance) prompt speculation that global finances are in good shape. This encourages investors to look elsewhere.

So how can you use this when changing currencies? Well, it’s simply something you should be aware of when dealing with foreign exchange. Knowing that disappointing US GDP is likely to prompt dollar strength, for instance, can help prevent you making costly mistakes when changing US dollars.

To find out more about changing US dollars, and receive personal guidance from a specialist foreign exchange broker, visit us at foreign currency exchange Pure FX. You can also call us on +44 (0) 1494 671800 or email enquiries@purefx.co.uk.