The latest data confirms that the US economy is improving, but it has not yet accelerated. The US dollar consolidates the uptrend.
US domestic demand subdued
In effect, the growth is still not enough, and the economy stays fragile in the face of a very low inflationary environment. The first estimate of the gross domestic product (GDP) for the third quarter was higher than previously forecast, +3.5% annualized, mainly due to the strength in exports, which might have been contributing for more than 1.2 points. In the contrary, the internal demand by the private sector declined to 2.9% year-on-year from the 3.0% shown in the second quarter. The results are quite disappointing and are only a fraction away from the average shown after the recession. In reality, the businesses do not appear to be as optimistic about an increase of demand, and the Federal Reserve should remain vigilant despite the recent announcement of ending the third wave of quantitative easing (QE3).
Is the US dollar trending for the long term?
Starting October 31, the Federal Reserve will stop increasing its balance sheet, but it will not stop buying treasuries and mortgage-backed securities. The decision had only one dissenter, Mr. Narayana Kocherlakota (Minneapolis), and the markets took this announcement as a change in policy, which should lead to an increase of the federal funds rate within a reasonable time. Are they correct? Only time will tell. Nevertheless, the study of cycles seems to confirm that the US dollar index touched an important low in June 2014, which followed the secular low reached in 2011, after about 10 years of declines. In the past 35 years, the US dollar bottomed out in 1980 after 8 years of declines and in 1995 after 10 years of declines. It then increased for five and seven years respectively.
Angelo Airaghi, www.ProfitsOn.com
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