Online Reporter
DURING May, most key currencies took advantage of the lethargic performance of the United States dollar, with the bulk of the 16 currencies monitored by Currencies Direct strengthening against the greenback.
The rand was the star performer during May, leaving all other emerging markets in its wake.
Compared to the trade-weighted average appreciation of 0,7 percent against the dollar by a core group of 11 key emerging market currencies, the rand gained 3,1 percent.
Reasons for the exceptionally strong performance of the unit are not difficult to find.
Apart from the low base effect relating to the knock that followed US President Donald Trump’s announcement of high tariffs on a range of South African exports to the US, international trade data for the first four months of the year confirm a healthy South African trade surplus.
Furthermore, the financial account of the balance of payments (which includes foreign direct investment flows) has been in surplus for nine consecutive quarters.
It is worth noting that the rand has also outperformed its peer group since the beginning of the year, with a 5 percent appreciation against the US dollar, more or less in line with the Chilean peso and the Malaysian ringgit, but significantly higher than the trade-weighted average strengthening of 2,7 percent of 11 key emerging market currencies around the globe.
“Dixie” remains steady
Although the British pound, the Chinese yuan and the Australian dollar also managed to strengthen marginally against the US dollar, the US dollar index (“Dixie”) has been quite steady at just below the 100-mark — where it has been hovering for the past seven weeks.
Prior to mid-April 2025, the Dixie had enjoyed three buoyant years at an average level of around 104, which was in sharp contrast to the previous five years, with an average index level of around 95, having been recorded for the period between April 2017 and April 2022.
The euro probably serves as another cue for the dollar’s future trend.
This currency is the second most traded currency in the world and enjoys an average daily trading volume of almost US$2,3 trillion.
The euro is used by 19 of the European Union’s member states.
In May, it followed the US dollar in remaining more or less on par with its value at the end of April.
Analysts will have their hands full predicting June currency trends, as President Trump has just fired a new salvo of tariffs, this time on the imports of steel and aluminium products.
Changes to trade flows that typically follow changes to import duties in the world’s largest economy can be expected to cause volatility in the foreign exchange markets.
Weak US economic data
Another issue that will impact the US dollar index is the latest weak US data, which could place pressure on the greenback.
During May, jobless claims increased to 240 000, and continuing claims rose to 1,92 million.
According to the latest report from the US Labour Department, the number of people collecting unemployment cheques in mid-May was the highest since November 2021.
Corporate profits also experienced a torrid first quarter, falling by US$118 billion — a further indication of a contraction in quarterly gross domestic product (GDP) — the first one in three years.
President Trump will probably try to claim some credit for his bizarre approach towards trade tariffs, as the goods trade deficit of the US narrowed sharply in April — mainly due to a record drop in imports.
One key reason for the dollar’s poor start to the year are expectations surrounding interest rates.
When US rates are higher than in Europe, fund managers tend to shift funds to US Treasury yields at the expense of Eurobonds.
As recently as mid-February, the majority of investors were expecting the Federal Reserve to cut interest rates only once in 2025, if at all.
The majority view has now changed to three rate cuts by the end of the year.
With inflation having dropped to near the US Federal Reserve’s target range and unemployment edging up, chances of a resumption of the rate-cutting cycle are improving by the day.
This will be a relief for prospective homeowners in the US, and the residential property market (including construction activity) could ultimately prevent a recession in the US. — Moneyweb
