PCE inflation report sparks Dollar decline

PCE, an acronym for Personal Consumption Expenditure, is ideal for the Federal Reserve to measure inflation. It helps them track how US citizens spend money on goods and services. A stronger PCE report reflects positively on the USD, and a weaker report means that the US Dollar is not necessarily in a good light.

The US Dollar is currently at its 3-month low. Yen is expected to gain momentum; however, traders are bullish amid the speculation that the Feds are done with rate hikes and could soon start cutting rates. March has been set as the initial month, followed by May, tentatively.

PCE Inflation report highlight

Home selling dropped below 723,000, nearly 5.6% for a seasonal fall. It is estimated that 679,000 units were sold in October. This could signal one of the two factors:

• Interest in property is dipping with time, or,
• Citizens are directing their expenditure to something that yields better utility than having probably a second home.

Alternate spending includes general groceries, medicines, and future savings. Also, a rise in the US inflation rate in 2023 has urged most investors to look for a reliable return source.

Some of the highlights of the PCE reports are:

• PCE in current dollars has gone up by 0.2% in comparison to the previous month, that is, September 2023.
• The price index has maintained the pace with no change whatsoever.
• The price index for October, in contrast to the previous year, the same month, has jumped by 3%; the increase after excluding food & energy is 3.5%.

A report to follow will be published in December. PCE comes out every month to measure inflation, helping to judge the performance of the US Dollar, too.

Dollar’s reaction

The US Dollar has been pitched against its peer currencies. The index was last seen at 103.11, the lowest since August. There is a 25% chance of the Feds bringing down the interest rate. May carries a chance of 45%.

Financial experts have credited the following factors which could help the US Dollar react differently:

• US rate cut
• Unwinding of long positioning
• Growth momentum

Other events traders look into for how the Dollar reacts are OPEC+ and PMI – Chinese Purchasing Managers’ Index.

Near 3-month Low

Experts say that the US Dollar still holds a significant advantage over Yen, and an aggressive unwind will help the currency rebound next year. The Japanese currency held 148.10 at a time when the Dollar was weakening. An expansion on the break for Yen is nevertheless less expected if the US Dollar begins making the climb.

• The Australian Dollar fell to $0.66105 after rising to $0.66155.
• Kiwi touched the highest since August 10, 2023, by the mark of $0.61055. It then slipped to $0.61005.

New Zealand may maintain its rate next time. If it does so, then it would be for the 4th consecutive time. Dollar/Yen is also expected to break trend channel support of 146.5/30 area.

Factors Contributing to Decline

Many economic factors, micro and macro, are contributing to the losing momentum of the native fiat currency. These are demand for currency, monetary policy, and export prices, to mention a few. The US Dollar could transition to a phase where it is more of a gamble than a reliable trade partner. Reports on the surface show that almost 23 countries have decided not to use the USD Dollar for their global trades.

Other factors are:

• The supply of USD is in abundance, thereby contributing to less demand.
• There is a huge gap between imports & exports to contribute to the trade deficit.
• The US Fed Reserve has majorly hiked its interest rates to hurt economic sentiments.

Losing a third of its value in 2023 requires a stronger rebound, especially in the next 12 months. The USD has lost approximately 13% of its value in 2023 alone.

Global Currency Impact

The local impact will be larger inflation, and the global impact will be de-dollarization. It could end up losing its dominance across the globe. This is evident because countries have already agreed not to include it in the middle of their trade with other countries. Eliminating the currency will lower their dependence on it and the price it brings to the table.

A new currency agreement will see complications, only to be resolved later for stronger ties between nations. The US rate cut has everyone’s attention, but it is not recommended to hold one’s breath since the cut could take time till March or May next year.

Conclusion

A stronger PCE report underlines that the currency has the potential to perform better. The Dollar has declined as Yen gets a soft spot for growth. The fall is at a 3-month low, scheduled to start recovering by the middle of the next year.