Vigorous U.S. Economy vs. Sluggish USD

Based on statistics, the U.S. economy has been thriving so far since early this year and enjoyed a powerful performance recently, which is demonstrated by the situation where PMI (Purchasing Managers Index) in manufacturing, overall economic activity and service sectors as well as new home sales are all stronger than previous figures and beyond expectation. The booming American economy went a long way to a continuous rally embraced by USD. However, even if the economic performance has been better recently, USD bears witness to a continual fall that is associated with the drop of debt interests.

Tension flaring up between Russia and Ukraine recently, capital flows into the debt market to avoid risks, which has led to the rise of debt prices and the fall of debt interests, in the context of the worsening conditions of the pandemic at different degrees worldwide. Lowering debt interests is also ascribed to many reasons, but underlying them is the strong demand for the 20-year U.S. Treasury bonds worth USD 24 billion sold by tender last week in America. However, it is worth mentioning that this powerful demand is due to the attractiveness of these bonds to buyers in non-American countries, in particular, some with negative interest rates, noted by analysts from related debt markets holding a view that Treasury bonds are still appealing to investors. If this is true, the upcoming market of USD may be supported to some extent as traders from Europe and Japan have to exchange their domestic currencies to USD when buying the U.S. bonds.

What‘s more, Russia has concluded its massive military exercises and retreated its troops, which mitigated the tension. As for the resurgent pandemic, it is believed to be a temporary issue, thereby making the aim of risk avoidance a transient factor for the fall of debt interests. The booming American economy and the increasing inflation are favorable to the U.S. debt interests in the long run. Speaking of the large-scale tax hikes on the horizon, it provides sufficient funds as support to the economic incentives and infrastructure plan proposed by Biden’s administration on one hand and cuts down the severe fiscal deficit in the U.S. on the other hand. All these above-mentioned basic factors are supportive for a long-term bullish USD market.

In addition, the Federal Reserve will convene a meeting this Wednesday at the U.S. time. Given no accidents, Powell will continue to send the hawkish message conducive to USD as he has totally made his attitude hawkish in the context of the extremely well-performed American economy and a continuously increasing inflation recently. However, provided the unpredictable future, if Powells attitude turns to be dovish because of his irresolution and the lack of confidence, USD may be imposed pointless pressure on. In general, I am still confident about the future market of USD if the American economy and the growing trend of inflation remain unchanged.