20180724-NATIXIS-Why_is_the_dollar_appreciating__7页_751kb

Flash Economics Summary

Core Content

This document analyzes the appreciation of the US dollar since March 2018 and evaluates the sustainability of this trend. It discusses the factors contributing to the dollar's rise and the potential challenges that could limit its appreciation.

Main Factors Behind Dollar Appreciation

• Rising US Interest Rates: US interest rates have increased faster than anticipated, attracting foreign capital to the US bond market.
• Tax Reform: The US tax reform, which reduced corporate tax rates from 35% to 21%, made US equities more attractive, leading to increased capital inflows into the US equity market during 2018.

Key Negative Factors

• Expansionary Fiscal Policy at Full Employment: This has led to an increase in the US external deficit, historically associated with dollar depreciation.
• Protectionism: Despite US customs tariffs, the price elasticity of imports is low, meaning protectionism does not significantly reduce import volumes and instead raises import prices, negatively impacting the US economy.
• Oil Price Increase: A rise in oil prices typically benefits the euro but is negative for the dollar.
• Temporary Tax Reform Effects: The benefits of the tax reform, such as increased earnings per share and share buybacks, are short-lived and concentrated in 2018.
• Slower US Growth: The US growth rate is expected to slow down due to the return to full employment, which may limit the pace of interest rate hikes by the Federal Reserve and reduce the dollar's appeal.

Conclusion

The dollar's appreciation since March 2018 is primarily driven by the rapid increase in US interest rates and the tax reform. However, several negative factors—such as the external deficit, protectionism, oil price increases, temporary effects of tax reform, and slower growth—make it unlikely that this appreciation will be sharp or enduring. Therefore, the document concludes that a sustained and significant dollar appreciation is difficult to predict.

Key Data and Charts

• Chart 1A & 1B: Show the dollar's appreciation against the euro, yen, and emerging currencies since March 2018.
• Chart 2A & 2B: Illustrate the rise in US interest rates and the increase in non-resident bond purchases.
• Chart 3: Demonstrates the impact of the tax reform on US equity market attractiveness.
• Chart 4A & 4B & 4C: Highlight the expansionary fiscal policy, external deficit increase, and historical dollar depreciation patterns.
• Chart 5: Indicates the limited impact of protectionism on US import volumes.
• Chart 6: Shows the inverse relationship between oil prices and the dollar.
• Chart 7: Reflects the temporary nature of the tax reform's effects on earnings and share buybacks.
• Chart 8A & 8B: Depicts the slowing US growth and its implications for interest rate policy.
• Chart 9A & 9B: Highlights the potential mismatch between the Federal Reserve's interest rate hikes and market expectations.

Disclaimer

• This document is intended for professional and qualified investors only.
• It is confidential and not to be disclosed to third parties without consent.
• It is not a financial analysis and does not constitute personalized investment recommendations.
• No liability is accepted for the distribution, possession, or delivery of the document.
• The information is based on public data and may be subject to change.
• The views expressed are those of the authors and do not necessarily reflect the views of Natixis or its affiliates.
• The document is subject to regulatory restrictions in various jurisdictions.

Regulatory Information

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• UK: Authorized by ACPR and regulated by FCA and PRA.
• Germany: Supervised by ACPR and subject to limited regulation by BaFin.
• Spain: Authorized by ACPR and regulated by Bank of Spain and CNMV.
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• Canada and Australia: Operates through subsidiaries and is subject to local regulations.
• Hong Kong: Intended for professional investors only.

Risk Factors

• The document acknowledges that the views expressed are based on the authors' personal opinions and may differ.
• It emphasizes that no part of the authors' compensation is related to the recommendations or views expressed.