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Markets

Dollar sluggishness persists after strong US GDP data

  • Strong GDP does little to boost dollar.
  • Fed's Powell quashes tapering talk, Biden touts spending.
  • CAD lifted to three-year high.
Published April 29, 2021
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NEW YORK: A report of strong US economic growth in the first quarter did little to bolster the dollar on Thursday, which stayed just off nine-week lows as a doggedly dovish outlook from the Federal Reserve and bold spending plans from the White House furthered expectations that inflation will rise.

Gross domestic product increased at a 6.4% annualized rate in the first quarter, the Commerce Department said, the biggest first-quarter increase in growth since 1984. First quarter growth was powered by consumer spending, which increased at a 10.7% rate versus a 2.3% pace in the fourth quarter.

"The US dollar is struggling to advance this morning after weakening notably Wednesday in the aftermath of another massive stimulus bill announced by US President Joe Biden and a Federal Reserve indicating it will act like a dove indefinitely," wrote Matthew Eidinger, a market strategist at Cambridge Global Payments.

Strong economic growth will typically increase the value of the dollar: stronger growth drives more spending, which in turn drives prices higher. As prices rise, the Fed has historically intervened by raising interest rates to prevent inflation. But the Fed is currently committed to keeping rates low, suggesting rising consumer prices could hamper the dollar.

The dollar can also be hurt by the government or central bank's injection of more dollars into the system. On Wednesday, President Joe Biden's push for another $1.8 trillion in spending risked expanding the US budget and trade deficits, a perennial Achilles heel for the dollar.

The dollar was also hurt by Fed Chair Jerome Powell comments on Wednesday which quashed speculation about an early tapering of asset buying, saying employment was still far short of target.

"The president is proposing more than $4 trillion in new spending and tax credits, equivalent to around of 18% of annual GDP. Put that way, the $4 trillion number is fodder for overheating fears when the economy is already surging with the help of around $5.5 trillion in COVID-related fiscal stimulus," wrote Jim O'Sullivan, chief US macro strategist at TD Securities.

Against a basket of currencies, the dollar index rose in the New York session, last up 0.22% on the day to 90.718. Earlier in the session, the index hit its lowest level since Feb. 26. The earlier dip in the dollar also drove the euro to a nine-week high, though the single currency has since stabilized to around $1.211.

The Fed's dovishness was in marked contrast to the Bank of Canada which has already begun to taper its asset buying, sending the dollar sliding to a three-year trough against the loonie of C$1.227.

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