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Since the beginning of the year, the US dollar has fallen 5.9 percent against the Euro and 6.7 percent against the Japanese Yen.
For many countries, including the US, a weak dollar has caused major problems ranging from deteriorating export growth to inflation. The one good thing that the weaker dollar was supposed to do is to save the US manufacturing sector. Unfortunately, today’s US economic data proved otherwise. Industrial production dropped 0.7 percent in the month of April, manufacturing activity in the NY region dipped into negative territory and even though the Philly Fed index rebounded from -24.9 to -15.6, it still remains deep in contractionary territory.
Unfortunately the depreciating value of the US dollar has failed to offset slowing demand. The automobile sector has been the hit the hardest from the double blow of higher oil prices and a weaker labor market. The US economy is continuing to struggle and there is no doubt that the Federal Reserve has a tough task ahead of them. Jobless claims increased last week while the NAHB housing market index fell to 19, one point shy of its record lows.
Although foreign purchases of US securities increased $80.4 billion in March, including short term securities like US Treasury bills and non-market transactions such as stock swaps, foreigners were actually net sellers. This reflects the sharp liquidation out of short term securities in the immediate aftermath of the Bear Stearns debacle.
Tomorrow we are expecting housing starts, building permits and the University of Michigan Consumer Confidence survey. With many construction projects still underway in big cities New York, a lot of inventory has yet to flow onto the markets. Combined with the uncertainty of the outlook for the US economy, housing starts and applications for building permits should continue to fall. In such conditions, it will be difficult for consumer confidence to improve and as a result, we expect the UMich index to fall to a fresh 26 year low.
Dollar weakness should prevail, particularly against the Japanese Yen, Canadian and Australian dollars.