USD Exchange Rate Report

Week of February 20 – February 24, 2023

By Luke Brown, The Quinnipiac Global Economics Research Team

Edits and comments by Chris Ball

Last Week’s Exchange Rate Indices

Source: Yahoo Finance and own calculations. Exchange rates are inverted to be USD per local currency (i.e., an increase indicates a stronger domestic currency) and then indexed to be 100 at the start of the period.

For the week of February 20 – 24, 2023, most currencies weakened relative to the United States dollar for the third consecutive week. The British pound (green), the only currency to reverse course, finished up approximately 0.35% during the week. All other currencies saw an initial strengthening, but weakened for the remainder of the week. The Swiss franc (yellow) and Australian dollar (gray) saw the largest declines with each finishing the week down approximately 0.75%. The Euro (blue), Canadian dollar (red), and Japanese Yen (maroon) were also down 0.6%, 0.5%, and 0.4%, respectively.

CHRIS COMMENTS

Two things jump out here. First, most currencies weakened relative to the USD (i.e., the USD strengthened) and, second, the British pound strengthened.

First, the general USD strengthened. The dates of February 21 and 22 last week were points when US data releases were showing a stronger economy than expected.  Markets have been watching the strength of the US economy as a sign of whether the US Fed will continue raising interest rates or not. 

The service sector purchasing manager’s index (PMI) came out stronger than expected.  Anything above 50 is considered “expansion territory” and anything below suggests “contraction”.  The PMI jumped from 46.8 in January (suggesting a slowing economy) to 50.2 for February (suggesting a growing economy). And this is a large single jump. This index asks managers to rate the business conditions as they see them.

Market participants have been watching to see if the US economy is weaking and inflation falling. If they are, then the Fed won’t keep raising rates. Or, at least, that’s the hope.  But the PMI moving strongly into growth territory called into question the good inflation data we saw in January and suggested the Fed still needs to raise rates higher.  Higher rates means more demand for US dollars and raises the USD’s value relative to other currencies.

Second, the British pound’s strengthening might have been for the same reason.  The UK’s service sector PMI also went from 48.7 to 53.3 in a surprise show of economic strength.  Additionally, while not breaking 50, the manufacturing PMI in the UK was expected to be 47.5 but came in at 49.2.  This too suggests a stronger UK economy and room for more interest rate hikes to fight inflation.

The intuition here is simply that the US and UK look like their economies are still over heated and not slowing down. As a result their central banks will raise policy rates further and this strengthens their currencies.

Subsequent US inflation data suggests that indeed inflation continues running hotter than January numbers were suggesting and markets were hoping.  The talk of further Fed rate hikes is filling the air once again.

Six Historical Trends

Source: Yahoo Finance and own calculations. Exchange rates are inverted to be USD per local currency (i.e., an increase indicates a stronger domestic currency. The center line is a rolling three-month average. The upper and lower boundaries are the average plus and average minus one standard deviation, respectively, for the same three-month period.

For the week of February 20 – 24, 2023, all currencies continued to move toward their means. Although the British pound (GBP) did increase this week it did not significantly alter its overall pattern and sits just less than one standard deviation below the three-month average.

All other currencies’ weakening patterns persisted this week. The Canadian dollar (CAD) now sits about three-fourths of a standard deviation below the three-month average All other currencies including the Australian dollar (AUD), Swiss franc (CHF), Euro (EUR), and the Japanese Yen (JPY) currently sit slightly below their respective three-month rolling averages.

It is interesting to note that all the currencies show weakening in recent weeks. Perhaps that is part of the slow realization that the US Fed will raise rates further this year so the USD still has some room to strengthen.