Fundamentals of the USD

The US Dollar's Presence Globally

The US Dollar has maintained a vital presence on the world stage for nearly a century. Most major governments maintain some of their currency reserves held in USD, this means the ripple effect of inflation and other valuation issues connected to the US Dollar have far reaching consequences.

There are many economic indicators pertinent to the US economy. Some of the relevant economic indicators to the US Dollar are released directly through the Federal Reserve (Fed), while others may be released from private data analysis firms. Each of the economic indicators listed and described below have the potential to affect the price and stability of the US Dollar upon their release. This is not a complete list of economic indicators that have an impact on the US Dollar.

The reports are listed in alphabetical order, for more on the report and its strength ranking take a look at each individual indicator description below. For the date and time of the next release for each report please browse our current economic calendar.

ADP Nonfarm Employment Change

The ADP (Automatic Data Processing, Inc.) Nonfarm Employment Change is a measurement of the number of new jobs created in the previous month (of course excluding farming related employment). This report is said to be a precursor to the much more widely followed Nonfarm Payroll Report, which of course is released two days later. The ADP Nonfarm Employment Change report began in March of 2006, and though it is said to offer insight into the pending Non Farm Payroll Report, its brief history accounts for its lesser credibility with traders.

Average Hourly Earnings m/m

This indicator gathers numbers relevant to wage inflation, specifically price increases in wages paid to nonfarm employees. When corporations and businesses are forced to pay higher wages this increased will soon be seen on the consumer end, thus wage inflation is viewed as a preemptive look into consumer inflation. Higher trends seen in this indicator tend to have a positive impact on a nation's currency, as wage inflation leads to consumer inflation and consumer inflation is relative to a strong economy.

Beige Book

The Beige Book gathers regional information from Federal Reserve branches on the strength of the economy within their own region. This information is collected two weeks prior to the FOMC‘s (Federal Open Market Committee) monetary policy meetings. The FOMC will use the Beige Book when considering the future of interest rates.

Chicago PMI

PMI stands for Purchasing Managers Index. Measured in Chicago (essentially accounting for the Midwest region of the United States) the Chicago PMI is conducted by the National Association of Purchasing Managers (NAPM). Before the report is published purchasing managers in the area are surveyed on the present situation of their firm, specifically whether the firm's purchasing activity is lower than, higher than, or equal to the previous month's activity. The word ‘activity' is meant in reference to employment, inventories, prices, orders, output, etc. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion in the region.

Consumer Confidence

In a monthly survey respondents are asked to measure and evaluate the future strength of the economy. Consumer optimism will of course have a positive impact on the strength or weakness of an economy, and ultimately the nation's currency; when consumer confidence is high the purchase of goods and services tends to increase as well, thus stimulating economic growth.

Consumer Sentiment

In a monthly survey conducted by the University of Michigan 500 respondents are asked to measure and evaluate both the present and the future strength of the economy. Consumer optimism will of course have a positive impact on the strength or weakness of an economy, and ultimately the nation's currency; when consumer confidence is high the purchase of goods and services tends to increase as well, thus stimulating economic growth.

Core Durable Goods Orders m/m

Core Durable Goods Orders essentially reports the same data as does ‘Durable Goods Orders' minus data including Transportation components. This is because purchase orders for aircraft and automobile components often see rapid increases for brief periods – such numbers weaken the clarity of the overall trend. As such, Core Durable Goods Orders is typically more widely watched than is Durable Goods Orders. Core Durable Goods Orders is a measurement of the total value of purchase orders placed through manufacturers for products with a shelf life of more than three years. This indicator is watched closely by traders primarily because of what it has to say about the future of an economy. When the total value of purchase orders is higher than previous months it can be expected that manufacturers will be pressed to fill the pending orders, as such employment will likely see an increase. When productivity and employment are expected to increase as a direct result of increased purchase orders the coming months are more likely to see an increased GDP (Gross Domestic Product).

Core PCE Price Index m/m

PCE stands for Personal Consumption Expenditures; The Core PCE Price Index is a measurement of consumer inflation rates, as seen when purchasing goods and services. Essentially, PCE is very similar to CPI (Consumer Price Index), the subtle difference lies in the fact that PCE gauges the level of price changes seen within consumer goods and services, specifically those targeted towards individual consumers (as opposed to production consumers). As is the case with other economic indicators, Core PCE Price Index implies that certain statistics are left out of what would be included in the normal indicator. In this case, Core PCE excludes Food and Energy because month-to-month purchase volatility of such can skew underlining consumer trends. The Federal Reserve tends to favor this indicator for its clear look at consumer inflation, for this reason traders watch the Core PCE closely.

Currency Manipulation Hearings

The US House Committee on Ways and Means will conduct a hearing to examine possible evidence of potential currency manipulation seen by countries in the Asian region. China and Japan will be closely looked at. The committee will then recommend whether or not the US should take action, and what the most plausible solution would be.

Durable Goods Orders m/m

Durable Goods Orders is a measurement of the total value of purchase orders placed through manufacturers for products with a shelf life of more than three years, i.e. automobiles and parts, appliances, airplanes and parts, computers, etc. This indicator is watched closely by traders primarily because of what it has to say about the future of an economy. When the total value of purchase orders is higher than previous months it can be expected that manufacturers will be pressed to fill the pending orders, as such employment will likely see an increase. When productivity and employment are expected to increase as a direct result of increased purchase orders the coming months are more likely to see an increased GDP (Gross Domestic Product).

ECI q/q

ECI stands for Employment Cost Index, a measurement of inflation rates found within salaries, wages and benefits paid to non-government employees. A rise in wage inflation rates are seen as a positive for a nation's currency. This is because wage inflation is directly linked to consumer inflation; when employers are forced to pay higher wages prices seen by consumers will soon be increased in order to compensate. Traders keep an eye on wage inflation as a means to gauge pending consumer inflation, which will of course ultimately affect GDP (Gross Domestic Product).

Existing Home Sales

Each month the National Association of Realtors releases a report measuring the number of homes sold in the prior month. Existing Home Sales and New Home Sales have collectively gained more respect from traders since the beginning of 2007, when sub-prime lending in the US began to fall under scrutiny. Most traders view Existing Home Sales as the report that carries the most weight between the two.

GDP Annualized q/q

This release is a quarterly look at Gross Domestic Product, revisions will follow in next two months. Gross Domestic Product is considered by most the broadest, most comprehensive barometer of a country's overall economic condition. It measures the sum of all market values on final goods and services produced in a country (domestically) during a specific period of time. A rising trend seen in a country's GDP of course indicates that the economy of said country is improving; as a result foreign investors are more inclined to seek investment opportunities within that nation's bond and stock markets. It is not uncommon to see interest rate hikes as a follow-up to a rising GDP, as central banks will have an increased confidence in their own growing economies. The combination of a rising GDP and potentially higher interest rates can lead to an increase in demand for that nation's currency on a global scale.

GDP is calculated and reported on a quarterly basis as part of the National income and Product Accounts (NIPAs). NIPAs were developed and are maintained today by the Commerce Department's Bureau of Economic Analysis (BEA). NIPAs are the most comprehensive set of data available regarding US national output, production, and the distribution of income. Each GDP report contains the following:

Personal income and consumptions expenditures

Corporate profits

National income

GDP Deflator Annualized q/q

Aside from basic GDP (Gross Domestic Product) figures the government also releases GDP deflators. The GDP Deflator report publishes the difference between nominal and actual GDP. The report takes a measurement of annualized quarterly inflation rates as applicable to all economic activity.

Interest Rate Statement

The Federal Open Market Committee (FOMC), which is the governing body of the US central bank, publishes an Interest Rate Statement eight times each year. Perhaps at the core of all economic indicators are those that relate to interest rate decisions. In fact, most would argue that other economic indicators are used by the average trader as nothing more than a means to anticipate pending interest rate changes. The bulk of the statement includes an explanation of the various economic factors that influenced the change in rates (or lack thereof) for the nation's short term interest rate, also referred to as the "fed funds rate". The report will also include insight as to what the next interest rate decision might be. Short term interest rates are of monumental importance to traders in any of the major financial markets. This is due to the fact that high interest rates attract foreign investors who are seeking the highest possible return in exchange for the lowest possible risk. Central banks are most concerned with price stability. If inflation rates are continually rising interest rates will likely be increased in an effort to bring prices back down. Globally, increased interest rates are said to entice foreign investment flows, which would of course, in turn, increase the demand and the standing of a nation's currency on a global scale. Seasoned economists understand the relationship between inflation and interest rates, namely that inflation tends to precede higher interest rates, which ultimately increases the global demand for a nation's currency.

ISM Manufacturing Index

The ISM Manufacturing Index is a monthly report released by the Institute of Supply Management that tracks the amount of manufacturing activity that occurred the previous month. The values for the index range between 0 and 100. If the index has a value below 50, due to a decrease in activity, it tends to indicate an economic recession, particularly if they trend continues over several months. A value substantially over 50 likely indicates a time of economic growth.

ISM Manufacturing Prices

This manufacturing indicator, conducted by the Institute of Supply Management, surveys 400 firms in an attempt to gauge price inflation seen within the manufacturing sector. Firms are asked whether or not there has been an increase seen in the prices of materials and services.

ISM Non-Manufacturing Index

ISM stands for the Institute of Supply Management. The NON-Manufacturing Index of course focuses on the non-manufacturing portion of the services sector. In the US this Manufacturing Index seems to be closely watched by traders in each of the major financial markets. Before the report is published purchasing managers are surveyed on the present situation of economic factors relevant to their position; factors such as new orders, inventories, production, employment, etc. Traders tend to keep an eye on this indicator because it tends to lead (leading indicator) into data that will later be released. This is because purchasing managers have an early view at the performance of their company. The indicator uses a reading of 50 to measure expansion, or the lack thereof. A reading above 50 would indicate economic expansion.

New Home Sales

New Home Sales reports the number of new privately owned homes sold or for sale in a given period (generally reported once a month). Economists note the correlation between changing mortgage rates and new home sales; namely that new home sales numbers tend to lag slowly behind changes made to mortgage rates. Also measured is the number of homes for sale in relationship to current sales prices; these numbers of course in turn will affect housing starts. Because the new home sales report is often subject to large revisions monthly numbers are often seen as unreliable. As a result this indicator's potential impact on the market is rather inconsistent; instead traders tend to give more credence to the existing home sales report which is released earlier in the month.

Nonfarm Employment Change

This indicator is a measurement of the total number of non farming related new jobs created in America for the previous month. It is perhaps the most important of all economic indicators in terms of its potential for immediate impact upon the currency market. The Nonfarm Employment Change (also referred to as the Nonfarm Payroll Report) is so largely influential because of its implications concerning the strength, or perhaps the weakness of the US economy. The number of new jobs created is closely connected to consumer spending, which in turn plays into GDP (Gross Domestic Product). This indicator is released on the first Friday of every month and contains data for the month prior. The report is the first of its kind (related to labor statistics) every month and is often regarded as an indicator in which surprise figures are generally anticipated. Traders in every major financial market watch this release very closely and are often forced to adjust trading strategies because of its immediate impact on the market.

Nonfarm Productivity q/q

This indicator takes a look at quarterly growth (annualized) in the non farming sector. Essentially labor efficiency for the production of goods and services is analyzed. This report is watched closely by traders because it tends to give a glimpse into the potential for inflation; as manufacturers may be forced to raise prices.

Personal Spending m/m

Personal spending is a simple measurement of the total amount spent by consumers in a given period (month) on goods and services. As consumer spending has far reaching implications into the overall picture of an economy, and considering that it accounts for more than half of GDP (Gross Domestic Product) a rise seen in the trends of this indicator should have a positive effect on a nation's currency.

Unemployment Rate

The Unemployment Rate, as one might presume, measures the total number of Americans that are unemployed and who are presently seeking employment. Because consumer spending is such a large part of economic health, and those who are employed tend to spend more than those who are not, a downtrend seen in this indicator will have a positive effect on a nation's overall economic strength. The Unemployment Report is considered by traders a lagging indicator, meaning that its insight offers little in the way of future projections. As such, this indicator is not as heavily regarded as perhaps its name would suggest.

Unit Labor Costs q/q

This indicator is a measurement that calculates output per hour minus inflation, or in other words the correlation between productivity per hour and compensation per hour. An increase in hourly compensation will of course increase unit labor costs; the only way to offset this cost is to facilitate higher labor productivity per hour. Higher trends seen in this indicator should positively affect a nation's economy and thus their currency as well. This is because when companies are forced to pay more for labor (wage inflation) consumers will soon see an increase in cost as well (consumer inflation). This indicator is important to traders, as wage inflation is often a precursor to consumer inflation, which will in turn affect Gross Domestic Product, interest rates, etc.