US Consumer Confidence: Stimulus Exit Possibility Boosts the Dollar

Latest US consumer confidence expectations index as compiled by the Conference Board jumped to 75.6 in December from 70.3 in November. While consumer expectations seem to be climbing, yet the Present Situation index, a gauge of how consumers feel at present, fell to 18.8 from 21.2 and was at a 26-year low. The present mindset of the consumers seems to be a reflection of the weak labor market conditions, where unemployment still seems to be a problem.

However, the index reveals that consumers are optimistic about the emerging economic scenario and seem to believe that the economy is getting better. Improved economic conditions were also suggested by gains made by manufacturing activity in the Chicago region. As per the Chicago branch of the Institute for Supply Management's report, its purchasing managers index rose to a seasonally adjusted 60.0 in December, from 56.1 in November.

The possibility of improved economic conditions is suggestive of the fact that the US Fed may start planning withdrawal of the stimulus package and may start to increase interest rates. Based on this evaluation, currency traders expect that the dollar may rise and have started going long on the dollar, which seems to be the reason for the current spike in the dollar. It may be noted that the firming dollar is reflective of improved economic conditions, which further lead to a hike in interest rates.

The current rise in the dollar is not representative of any risk aversion led rise in the dollar. Supporting this argument is a weakening of gold prices. Gold, which may be considered another important tool for risk aversion became a less demanded commodity suggesting that the demand for the yellow metal is waning due to improvement in the US economy. Gold futures slid nearly 11% from their high price of $1,227.50 an ounce in early December. Earlier demand for the yellow metal had risen due to the metal being bought as a hedge against inflation, and a safe haven from financial crisis or as an alternative to the dollar.

Though the dollar did demonstrate and upward movement, it was based on thin trading and a few large deals could have impacted its movement. The upward movement could also have been a result of year end closure of accounts requiring purchase of dollars. Notwithstanding the cautionary note, the upward dollar direction seems to be taking a footing based on expectations of better economic performance and some key indicators being suggestive of that. Performance of the dollar in 2010 is likely to depend upon how the US economy shapes up and how quickly it sheds recessionary tendencies. All indicators are suggestive of a better year ahead.

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