US GDP Analysis: Strong growth now, stronger even later, three reasons for the dollar to rise

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  • The US economy grew at an annualized pace of 6.4%, within estimates. 
  • GDP was held down by inventories, which will likely be replenished later on.
  • Robust business investment implies an acceleration down the road.
  • A leap in prices means inflation is moving up, potentially triggering a rate hike.

The Federal Reserve will keep printing dollars and depress the currency – less than 24 hours after making that assumption, Gross Domestic Product figures for the first quarter are already causing a rethink. While the headline is at 6.4% annualized growth – well within expectations – the components are pointing to heating and perhaps overheating economy. That could boost the dollar.

Here are three positive developments that could boost the greenback:

1) What comes down, goes up

Had inventory growth remained unchanged, GDP would be 9% and not 6.4%. The drawdown in physical stocks dragged growth some 2.64% annualized, a substantial impact.

When inventories are depleted during one quarter, they tend to be replenished in the following one. Moreover, this drawdown could push manufacturing higher. The second quarter is already looking strong amid the quick reopening, and now it looks even brighter.

2) Investing in the future

Business investment is up 9.9% annualized in the first quarter and home investment has leaped by 10.8%. Such expenditure will bear even more fruits in the future, whether in the current quarter or the next ones. It is also a sign of confidence in the world’s largest economy.

3) Inflation is coming

Jerome Powell, Chair of the Federal Reserve, prepared a full speech to explain why inflation is transitory – base effects and bottlenecks are to blame. The Fed is watching but assumes price rises will dissipate.

However, inflation figures published in the GDP report point surprised to the upside,w with the price index – aka the “deflator” jumping by 4.1% annualized compared with 2.6% projected. While the core figure is only at 2.3%, the rapid advance in headline prices could eventually spill into inflation expectations. That could move the Fed toard tapering its bond-buys sooner rather than later.

Overall, growth components are pointing to faster expansion down the line, and could eventually push the dollar out of its current hole. 

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Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.