Why the Dollar Rises Despite Slowing US Consumer Spending

July Retail Sales Down 1.1%... Decline Exceeds Expectations
Expansion of Dollar Preference
Concerns Over China Economic Slowdown, Afghanistan Situation, and Delta Variant Impact

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] U.S. consumer spending in July fell more sharply than expected, raising concerns about an economic slowdown in the second half of the year.

Despite worries over the worsening U.S. economic situation, the dollar continued its strength due to a preference for safe-haven assets triggered by the Afghanistan crisis.

The U.S. Department of Commerce announced on the 17th (local time) that retail sales in July decreased by 1.1% compared to the previous month. Consumption declined in most sectors including automobiles, clothing, sporting goods, and furniture. This drop was larger than the market expectation of a 0.3% decrease. The previous month's growth rate was revised upward from 0.6% to 0.7%, making July's decline even more pronounced.

Core retail sales, excluding gasoline and food, fell by 0.4% from the previous month. This also fell significantly short of the market forecast of a 0.1% increase.

The decline in retail sales coincides with expectations of reduced economic activity due to the spread of the Delta variant.

There is also analysis that consumers are tightening their wallets as prices soar. Bloomberg News identified that consumers have begun to reduce spending on services.

It is also expected that the Delta variant is suppressing economic activity and limiting demand in the travel and entertainment sectors. The Wall Street Journal reported that retail sales sharply declined due to reduced automobile purchases and the spread of the Delta variant.

Consumer sluggishness had already been anticipated. The University of Michigan Consumer Sentiment Index released last week fell to its lowest level since April last year, suggesting a potential deterioration in consumer confidence. Since consumption accounts for two-thirds of the U.S. economy, its impact on the economic situation is significant.

This issue could also affect the Federal Reserve's future monetary policy normalization. Puja Siram, a U.S. economist at Barclays, predicted, "As government support measures decrease, the pace of increase in service spending will fall significantly more than initially expected."

Bloomberg noted that economists had forecast consumer spending growth at an annualized rate of 4.5%, which is a sharp slowdown compared to 11.8% in the second quarter survey.

Despite weak retail sales, the dollar recorded strength. The dollar index reached 93.135, the highest level since the end of March. This is analyzed as a complex phenomenon reflecting concerns over the Chinese economic slowdown, the spread of the Delta variant, and geopolitical worries due to the Afghanistan crisis.

Carl Schamotta, Chief Strategist at Cambridge Global Payments, explained, "The slowdown in the Chinese economy and political turmoil caused by the Afghanistan crisis have stimulated demand for the dollar and led to selling of emerging market currencies."

This content was produced with the assistance of AI translation services.