The impact of the U.S. dollar

The 1st major corrective phase in almost 10 months for the U.S. dollar continues to unfold. With the US$ declining 7.5% since March, it has provided a boost for many global currencies and a much needed lift for commodity bulls.

The dollar's drop has escalated the Euro by almost 10%, lifted the British Pound by 8%, raised the Australian dollar by 6.6% and increased the value of the Canadian currency by 6.4%.

But the biggest impact of the recent U.S. dollar's pullback is on commodities.

The world's heaviest traded resource (Light crude oil) has rose a remarkable 44% since March, gold is up 6.5%, silver has advanced 13.7% and the S&P Industrial metals index (GYX) is up 9.9%.

And all since the start of the dollar's decline just 60 days ago.

But the current soft economics indicates the weakness in the dollar is likely not complete.

Weak retail sales data for April does not bode well for Q2 GDP. Also the large inventory build-up in Q1 GDP means that in Q2 we could see some of this inventory buildup drawn down resulting in lower growth.

The strength of the U.S. Dollar is importing deflation into the US and has pushed the headline Producer Price Index (PPI) lower to minus 1.3% which is the lowest we have ever seen.

US jobless claims are a bright spot in the U.S. economy falling a further to 264,000 which pushed the 4-week average to a 15 year low.

Bottom line: The weaker-than-expected U.S. economic data has been a boom for commodity markets.

The dollar's decline since March has lifted most natural resource prices off their bases.

We expect slightly more downside pressure for the US$ in the next few weeks and ultimately reaching the $0.90-$0.92 range.

Nevertheless, the long-term picture for the dollar continues to be bright. With many superior economic elements to other G8 countries and the promise of an interest rate increase in the second half of 2015, we believe there is additional upside for the greenback in the months to come.

Our long range target for the dollar remains at $1.20.
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