In our previous commentary previous commentary on the US dollar, we wrote that the buck was set to rise further thanks to our forecast for slowing US growth and inflation. Given the US dollar’s safe haven qualities, the currency performs the best when economic conditions deteriorate.

Following the publication of our last commentary, the performance of the US dollar index (a measure of the currency against major peers) has been mediocre. The index moved up from 95.10 on August 8 to 95.50 on October 3 – hardly a significant move. While we called for US growth to begin slowing last quarter, US economic data continued to accelerate instead. As financial markets have repriced expectations for Q3 growth in the US, the US dollar has been relatively weak as a result.

Going forward, we forecast that US growth and inflation will begin slowing this quarter (Q4 2018). In rate-of-change terms, the US economy has been accelerating since Q3 2016. Following 8-9 quarters of accelerating GDP growth (the longest expansion in recorded US history), the economy will face a combination of (1) a deteriorating slowdown in all major regions outside the United States, (2) steepening base effects, and (3) weakening drivers for continued growth. As the US joins the global downturn, expect the dollar to rise much further.

Spectacular US data = weak dollar

While the US dollar index surged towards 97 in mid-August, the rally has since run out of steam. The primary culprit is the continued outperformance of the US economy. Recent data including year-over-year retail sales, industrial production and durable goods orders have accelerated to growth rates not seen in many years.

Last month’s retail sales figures were particularly noteworthy, as domestic consumption makes up a significant portion of the US economy. While retail sales in August decelerated to 6.6% (versus 6.7% previously), July’s numbers were revised up by a significant degree. Recent trends in retail sales and industrial production are shown below: