What Is Aiding The U.S. Dollar

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Includes: FORX, UDN, USDU, UUP
by: Andrew Sachais

Summary

Personal consumption in the U.S. is rising.

Additionally, real disposable income is expanding, alongside weaker price pressures.

With economic activity increasing in the U.S., the dollar should strengthen in coming months.

The U.S. dollar is benefiting from a rise in real disposable income, translating into increased personal consumption. The U.S. dollar is represented by PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP).

In May, the real personal consumption figure came in at an annual pace of 2.88%, above the previous month's reading of 2.79%. Since reaching a low of 1.66% growth in 2012, personal consumption has trended steadily higher, seen below. After being adversely affected by weather in the first part of the year, household spending has started to pick up in the spring.

"Americans spent freely in May after hunkering down during much of the winter, delivering a much-needed jolt to an economy that is starting to reap bigger benefits from sturdy job growth and depressed energy prices," according to the Wall Street Journal.

Data provided by the Federal Reserve

Moreover, labor market strength has translated into increased disposable income. In May, the disposable income figure came in at an annual pace of 2.32%, above the previous month's reading of 2.21%. Since hitting a low of -1.0% contraction in late 2013, disposable income has risen to current levels, seen below. Added employment in the labor market is boosting pay.

"Consumers are being buoyed by a strengthening labor market that finally appears to be boosting their pay as employers compete for available workers.

Consumers' incomes-including wages as well as government benefits-grew last month, the same as April, marking the best two-month stretch of income growth since early 2014," according to the Wall Street Journal.

Data provided by the Federal Reserve

Finally, weak price pressures are benefiting consumers' purchasing power as well. In May, the inflation figure came in at an annual pace of 0.88% growth, below the previous month's reading of 1.00%. After reaching a high of over 2.60% in early 2012, consumer prices have fallen to current levels, seen below. Low gasoline costs continue to weigh on price measures.

"At the same time, households continue to get a boost from cheaper gasoline prices, which remain 24% lower from a year ago despite a recent run-up. Americans had been stashing the gas savings but are now spending them," according to the Wall Street Journal.

U.S. policymakers are faced with another dilemma. Household spending is rising, alongside a tightening labor market, but inflation measures continue to slow. The confluence of rising energy costs, as well as increased headline wage growth should be enough to push inflation higher, but this scenario remains elusive. Increasing economic activity should continue to boost the U.S. dollar nonetheless, leading to strength in the currency in coming months.

Data provided by the Federal Reserve

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