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#1
The greenback makes a comeback
PUBLISHED: 8 HOURS 33 MINUTES AGO | UPDATE: 4 HOURS 12 MINUTES AGO

JOHN KEHOE
After six long years ­suffering the lingering effects of the worst United States recession since the 1930s, Pete Pappas senses the United States economy is improving. “We’ve seen a nice pick-up, particularly in our manufacturing clients.”

Pappas is the owner of a labour hire firm in North Carolina. “It’s becoming more difficult to find truly skilled people,” he says.

During the past year, the firm has placed about 200 extra workers into skilled trades and manufacturing roles, an increase of about 30 per cent on last year.

In Vermont, in the north-eastern corner of the US, car dealer Daniel Bokan at Shearer Chevrolet Buick GMC Cadillac says new car sales are up 28 per cent over the past year.

Down the road at the Lake Champlain Regional Chamber of Commerce, president Tom Torti says he is “bullish” on the local economy, as three new hotels are built in the area.

SUSTAINED RECOVERY
The world’s largest economy appears to be on a path to a sustained recovery.

Unemployment is below 6 per cent for the first time in six years. House prices had crashed in the subprime mess but are gradually recovering.The economy may have ground to a halt early in the year due to a bout of freezing weather, but over the past six months, economic output has rebounded.

Investors around the world are now looking to the US to see if it can lift the world economy from its feeble state and withstand the volatility that this week saw global financial markets whipsaw.

“It’s almost as if the US is coming back to lead the global economy after being gone for five or six years,” says IHS chief economist Nariman Behravesh.

Across the Atlantic, Europe is at serious risk of a triple dip recession, as Germany’s economy slows sharply and doubts renew about Greece’s finances. Japan continues to struggle to recover from its near-two-decade slump, despite cautious reform efforts from the conservative Abe government.

Emerging market economies, including China, are slowing after being the engine rooms of growth for most of the past decade.

Apart from financial matters, the Ebola epidemic is a new threat to the world economy if it spreads in a major way beyond Africa. Coupled with ongoing geopolitical instability in the Middle East and eastern Ukraine, investors are getting jittery, ­dumping stocks and rushing into US and German government bonds.

The negative global forces at play ­hammered sharemarkets around the world this week.

On Wall Street, the Dow Jones Industrial Average touched an eight-month low on Thursday and is about 7 per cent below its record high.

That could mean the US Federal Reserve will keep rates near zero for longer. Dovish Fed board member James Bullard of St Louis said on Thursday the central bank should continue its stimulatory asset ­purchases in October instead of ending the program, as it had signalled.

FED LOATH TO LIFT RATES
Australia has plenty riding on the Fed’s actions. Ideally, Reserve Bank of Australia governor Glenn Stevens would like to see the Fed tighten policy sooner rather than later. House prices in Australia are surging and some analysts are warning of a dangerous asset bubble. But the Reserve Bank will be loath to lift rates before the Fed to contain any exuberance. A unilateral tightening of monetary policy would likely drive up the value of the local currency, crimping the domestic economy at a time when it is already performing below par.

Before raising rates next year, Fed chair Janet Yellen wants to see continued evid­ence the US economy is recovering and ongoing jobs growth with a little, but not too much, wage inflation.

So from the Reserve Bank board room at Martin Place in Sydney, to Berlin, to London, business and investors are looking to the United States to lead the globe.

The world economy needs a saviour. The US appears to be in a rare bright spot. But even then, it is all relative. And it could all be derailed by troubles elsewhere.

The aggregate economic US data shows an economy that is on the mend. But across the country, business is patchy.

Paul Nordlund, owner of a boat building and repair company at Tacoma, ­Washington, says business has improved from the depths of the recession, but it “hasn’t come close to the 15 years prior to the downturn”.

Even wealthy clients who can afford to buy a new yacht are reluctant. They don’t want to be seen flaunting their riches in front of former staff who were laid off during the recession.

“I think it’s improved, but when someone brings in a boat for a repair it’s ‘Do the minimal’,” Nordlund says.

“Everyone is still cautious and nervous about what the future is going to look like.”

The Nordlund Boat Company employs about 50 staff, up from 19 when the recession hit in 2008 but well below the peak of 75.

The official unemployment rate masks lingering weakness in the jobs market. Many have given up looking for work and there are 6.9 million fewer Americans ­working or searching for work than before the 2008 crash.

WORKERS NOT CONVINCED
Americans read and hear news that the economy is getting better, but many do not believe it.

Two-thirds of respondents to a Pew Research Centre poll agree “the economy is recovering, but not so strongly”.

Some 56 per cent say their family’s incomes are falling behind the cost of living, in line with results of October 2008 during the height of the global financial crisis.

While there has been a massive increase in the income share of those in the top 0.1 per cent of the income pie over the last decade, the median household income adjusted for inflation is no higher than in 1980.

Labour’s share of income has fallen to its lowest level in the postwar period.

In a sign of the times, Wells Fargo employee Tyrel Oates, who earns about $US15 an hour ($17) in the bank’s collections department, last week emailed the chief executive John Stumpf and asked for a $US10,000 pay rise. He cc’d in 200,000 colleagues on the request, reportedly writing “income inequality” in the email subject line.

Brookings political analyst Thomas Mann says the sombre mood among middle-class Americans reflects a feeling that the economic recovery is not broad.

“We’ve seen a dramatic reduction in the unemployment rate, a succession of months with over 200,000 jobs created and real GDP growth, and dramatic reduction in the budget deficit,” Mann says.

“We’ve done pretty well on some of the basic indicators, and yet the stagnant wages and overall insecurity have left Americans feeling even worse than they did before.”

THE ‘BEST PLACE TO INVEST’
Wall Street’s elite are more bullish. The Australian who is chief executive of Morgan Stanley, James Gorman, said last week the US is now the best place to invest in the world.

“That’s a great thing, because it happens to be the world’s largest economy and most dynamic economy,” Gorman said in Washington.

The Fed raising rates from their artificial lows will be a positive sign the economy is improving, he says.

“It’s a good outcome. Let’s feel good about that,” Gorman says.

JPMorgan chief executive Jamie Dimon believes “America is chugging along”.

“I’m a real long-term bull on the US economy,” he says, pointing to the strength of the country’s innovation, technology universities, technology, capital markets and population growth.

“I believe things holding us back are gridlock [in Congress] and Europe.”

The political gridlock that has plagued Washington could worsen or improve depending on the results of the November 4 congressional elections.

Europe and Japan are facing the serious risk of deflation, despite their central banks trying to pump prime the economy. Falling prices in the debt-plagued economies would be bad news. If people anticipate prices will be lower in the future, they are likely to squirrel away money and stop spending in anticipation of cheaper prices. The downturn would become self-fulfilling.

So can the US not only withstand the problems in Europe and Asia but drag the world economy to its feet?

NOT THE LOCOMOTIVE IT WAS ONCE
The recent surge in the US dollar will assist Europe and Japan to produce a little more badly needed inflation.

But while it’s still the world’s largest ­economy, the US accounts for about 20 per cent of world GDP today compared to about 50 per cent at the end of World War II.

“The US economy is not quite the ­locomotive it was 20 or 30 years ago,” IHS’s Behravesh says.

The US can still provide meaningful impetus. But if Europe and Japan remain sick and emerging market economies ­continue to slow, the once mighty America is unlikely to single-handedly pull the world from its rut.

“Strong US growth is not sufficient to raise the euro zone and Japan from their ­torpor,” Capital Economics economist Andrew Kenningham says.

“The trade links are too small and the problems in both economies are domestic and deeply entrenched.”

The oil price this week tumbled to almost $US80 a barrel this week and ­analysts and investors are debating if this is good or bad news for the US economy. The returns of oil producers will be lower, but energy-intensive businesses such as manufacturers will enjoy lower input costs and consumers will have higher ­disposable income to spend on goods and services.

Citigroup’s global head of commodities research, Ed Morse, says cheap oil will act as a stimulus for the global economy.

He estimates the break-even point for US oil producers, which use revolutionary new fracking and horizontal drilling technology, is around $US40 to $US70 a barrel in the Eagle Ford in Texas. Australia’s biggest company, BHP Billiton, is a major player in the region.

The US economy can probably withstand persistent weakness in Europe, barring a major collapse. Domestic demand is a large driver of the US economy, which is less reliant on exports than most other countries such as China and Germany.

Consumer spending accounts for 70 per cent of the economy.

But US growth of 2 .5 to 3 per cent is below the robust 4 per cent recorded in the Bill Clinton years of the 1990s.

The United States’ contribution to the world economy will be gladly welcomed.

But for a durable recovery, other ­economies, particularly Europe, must pull their weight.

The Australian Financial Review

BY JOHN KEHOE
John Kehoe
John is The Australian Financial Review's Washington correspondent.

@Johnkehoe23
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#2
Just remember when it becomes a 1-way no brainer trade.... disaster will unfold...

US dollar spluttering after surge
• IRA IOSEBASHVILI, MIN ZENG
• THE WALL STREET JOURNAL
• APRIL 06, 2015 8:24AM

The US dollar’s record rally, which rattled everything from the oil market to US corporate earnings, is running out of gas.
Many investors remain bullish for the longer term, but some say the greenback’s biggest gains are in the rearview mirror.
The dollar’s downshift reflects heightened concerns that the US economy is cooling, which were reinforced on Friday by a much weaker-than-expected jobs report. That has a growing number of investors betting the Federal Reserve will put off any interest-rate increases until the end of 2015.
Just a few months ago, many investors were thinking a Fed rate boost, which would be its first since 2006, could come as soon as June. Higher rates in the US make owning the dollar more attractive.
Also pressuring the US currency is a brightening outlook for the struggling economies of Europe. The dollar’s surge during the first three months of the year was fuelled by aggressive economic stimulus efforts from the European Central Bank, which drove down eurozone bond yields. The greenback rose 12.7 per cent against the euro, its biggest quarterly jump since the common currency was created in 1999.
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• MOREGreenback: bad news for Australia
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“The easy part of the dollar rally is definitely behind us,” said David Woo, head of global rates and currencies at Bank of America Merrill Lynch in New York.
For US investors, a stalling out of the dollar’s rally could have widespread implications, both good and bad.
The buck’s big rise over the past year has been blamed for hurting profits among US multinational companies as their goods become less competitively priced overseas, hitting their share prices and crimping manufacturing activity.
A decline in the dollar could lessen those headwinds, as well as contain downward pressure on oil prices and provide relief for the battered energy sector. Because oil is priced globally in dollars, a weakening US currency makes oil cheaper for buyers using other currencies, supporting demand.
“A weaker dollar could help on a lot of fronts,” said John Canally, chief economic strategist for LPL Financial. The jobs report will make it harder for the dollar to extend its rally, he said.
On Friday, the dollar took its biggest tumble in almost two weeks following slower-than-expected US job growth for March. The Labor Department reported non-farm payrolls grew by 126,000. Economists surveyed by The Wall Street Journal had forecast an increase of 248,000.
The euro climbed 0.9 per cent on Friday to its highest level in a week, at $1.0973, while the dollar slid 0.6 per cent versus the yen, to Yen118.97.
The dollar’s recent drop has moved it away from multiyear highs it reached against rivals. The Wall Street Journal Dollar Index, which measures the greenback’s performance against a basket of currencies, hit a 12-year high on March 13 at 89.33, up 22 per cent from a year earlier.
But since the Fed signalled a continued go-slow approach to raising rates on March 18, the WSJ Dollar Index has fallen 2.6 per cent.
The weak jobs report followed a string of other soft economic data points, including readings on manufacturing activity and retail sales.
Some investors are worried that the US economy, which has been a bright spot in the world, may advance at a slower pace than many economists and analysts have anticipated. This could hurt the outlook for companies’ earnings and sap appetites for US stocks and corporate bonds sold by lower-rated companies, known as junk debt. Investors would instead seek shelter in ultrasafe US government debt.
The uncertain growth outlook has investors pushing back their expectations for when the Fed will raise interest rates. The Fed has kept the federal-funds target rate near zero since December 2008 to help the economy regain momentum after the financial crisis.
Following the jobs report, the expected likelihood of a Fed rate increase in September dropped to 28 per cent from 33 per cent, according to the fed-funds futures market, where investors position for changes in these short-term interest rates. Investors trimmed the odds of a rate rise in December to 57 per cent late on Friday from 65 per cent before the jobs report.
Ugo Lancioni, who manages $18 billion in currency assets at Neuberger Berman, said he has “taken quite a lot off” his bullish dollar positions in recent weeks amid the more dovish statements from the Fed and weaker US data.
“It doesn’t mean the dollar rally will stop,” Mr Lancioni said. But “the dollar is a less attractive option than before.”
Some investors said that even without the soft patch in US economic data — which is being partly attributed to harsh winter weather, as was the case for a slowdown in 2014 — the dollar was due for pause.
The dollar’s rally “is the kind of move you only expect to occur once every 20 years or so,” said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management, which manages $US62.8 billion.
Mr Dowding, who had been bullish on the dollar since last summer, has in recent weeks trimmed bets the dollar will rise against the euro. But he still expects the euro to fall to parity with the dollar by year-end.
“Although we continue to expect the dollar to strengthen, the move should be much more gradual,” Mr Dowding said.
The dollar’s rally is also being undercut by nascent signs of economic improvement in the eurozone.
Manufacturing activity in the region during March grew at its fastest pace in 10 months, a survey of purchasing managers showed last week. The ECB in March boosted its growth forecasts, saying it expects the region to grow 1.5 per cent this year, compared with earlier forecasts of 1 per cent.
If the ECB manages to turn around the eurozone’s economy, “the euro could actually see a bottom soon,” said John Fath, head of global interest rates in international asset management at BTG Pactual in New York, which manages $US7 billion.
Still, many investors say the longer-term trends favour a stronger dollar.
For one thing, government-bond yields in Europe are at extremely low levels, leading investors to buy dollars as they move money into higher-yielding U.S. government bonds. German 10-year bonds, for example, are yielding 0.19 per cent, while the U.S. Treasury 10-year note is yielding 1.84 per cent.
And investors still expect the Fed to raise rates before the ECB.
“Europe is not going to slow its easing, and U.S. rates are still set to go higher,” said Christopher Stanton, who oversees about $200 million at California-based Sunrise Capital Partners LLC. “That’s not changing.” As a result, the dollar’s long-term uptrend should continue against the euro, he said.
Wall Street Journal
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