The US dollar rose against most of its major peers on Tuesday, as the latest economic data showed that the US consumer spending and inflation remained strong in July, despite the surge in COVID-19 cases and the uncertainty over the fiscal stimulus.
US retail sales beat expectations in July
According to the Commerce Department, US retail sales increased by 0.7% in July, beating the market expectations of a 0.3% decline. This was the fourth consecutive month of growth, as consumers spent more on online purchases, electronics, clothing, and gasoline. The retail sales data is a key indicator of consumer spending, which accounts for about 70% of the US economic activity.
The strong retail sales data suggested that the US economy was resilient to the impact of the Delta variant of the coronavirus, which has caused a spike in infections and hospitalizations across the country. However, some analysts warned that the consumer spending could slow down in the coming months, as the federal unemployment benefits expire and the consumer confidence declines.
US inflation remains elevated in July
The Labor Department reported that the US consumer price index (CPI) rose by 0.5% in July, slightly lower than the 0.9% increase in June. However, the annual inflation rate remained at 5.4%, the highest level since 2008. The core CPI, which excludes food and energy prices, increased by 0.3% in July, down from 0.9% in June. The annual core inflation rate eased to 4.3%, from 4.5% in June.
The inflation data showed that the price pressures were still high in the US economy, as the supply chain disruptions, labor shortages, and strong demand continued to push up the costs of goods and services. The Federal Reserve has maintained that the inflation is transitory and will ease as the economy recovers from the pandemic. However, some market participants are concerned that the inflation could persist and force the Fed to tighten its monetary policy sooner than expected.
USD benefits from safe-haven demand and policy divergence
The USD gained strength against most of its major peers on Tuesday, as the strong economic data boosted its appeal as a safe-haven currency and widened its policy divergence with other central banks. The US dollar index (DXY), which measures the greenback’s performance against a basket of six major currencies, rose by 0.4% to 93.26, its highest level since April.
The USD was particularly strong against the EUR, which fell by 0.5% to 1.1706, its lowest level since November 2020. The EUR was weighed down by the disappointing German ZEW economic sentiment index, which dropped to 40.4 in August, from 63.3 in July. The ZEW index measures the expectations of financial market experts for the German economy over the next six months.
The USD also gained ground against the GBP, which slipped by 0.3% to 1.3746, as the UK reported a record number of COVID-19 cases on Tuesday, with more than 36,000 new infections. The GBP was also under pressure from the uncertainty over the UK’s trade relations with the EU, as both sides failed to reach an agreement on the Northern Ireland protocol.
The USD was mixed against other major currencies, such as the JPY, the CHF, and the CAD. The USD rose by 0.2% against the JPY to 109.64, as the Japanese economy contracted by 1.3% in the second quarter, worse than expected. The USD fell by 0.1% against the CHF to 0.9148, as the Swiss franc benefited from its safe-haven status amid rising geopolitical tensions in Afghanistan and China. The USD rose by 0.3% against the CAD to 1.2589, as the Canadian dollar was dragged down by lower oil prices and weaker manufacturing sales data.
Outlook for USD
The outlook for USD remains positive in the near term, as long as it is supported by solid economic data and safe-haven demand. The market will be closely watching for any signals from the Fed regarding its tapering plans and interest rate outlook.
The next major event for USD will be the release of the minutes of the Fed’s July meeting on Wednesday, which could provide some clues on how close or far away is a tapering announcement from Fed Chair Jerome Powell.
