End of the Dollar’s Rise?
The dollar has been rising for the past eighteen months on the market belief that the Fed would shut down its quantitative easing program (it did in December 2014) and that it would begin to normalize monetary policy by raising interest rates. The Fed raised the Fed Funds Rate a quarter point in December 2015 and signalled that more rate hikes were coming in 2016.
Also helping the dollar to strengthen were the monetary policies of The Fed’s counterparts at the Bank of England, the Bank of Japan and the European Central Bank, all of which have been pursing lower or negative interest rates and their own quantitative easing programs.
Further adding to the dollar’s rise was the widespread belief that the U.S. economy was immune to the global slow down evidenced by a frothy stock market, falling unemployment, “solid” job growth, rising home prices and record car sales.
Then January 2016 happened. The U.S. stock market fell almost every trading day of the month and the economy appeared to be decelerating. Markets analysts are starting to believe that as the stock market falls and incoming economic data continues to come in below expectations, that the Fed can’t/won’t raise rates. This dynamic is pressuring the dollar.
Recently, Fed officials have also begun to discuss negative interest rates in a way that hints they may be preparing for them. On Wednesday, New York Fed President William Dudley expressed concerns about tightening financial conditions and the impact a strong dollar might have on the U.S economy.
Dudley’s comments were interpreted to mean that the Fed would be reluctant to raise interest rates futher in light of tightening financial conditions, especially if raising rates would act to strengthen the dollar.
Soon after Dudley’s comments, the US Dollar Index* fell from 98.75 to 97.17 by mid afternoon on Wednesday or a decline of about 1.6%.
The dollar continued its descent on Thursday as it fell to 96.50 in early morning trade after Dallas Fed President Robert Kaplan urged “patience” on further rate hikes.
Today’s January 2016 Non Farm Payroll Report (NFP) from the U.S. Bureau of Labor Statistics indicated that just 151,000 new jobs were created. Market expectations averages ranged from 180,000-200,000. The bulk of new jobs created were in the retail services, restaurant and healthcare sectors. The unemployment rate fell to 4.9% and the labor force participation rate rose from 62.6% in December 2015 to 62.7%. Average hourly earnings rose 0.5%.
The US Dollar Index was unchanged immediately after the NFP announcement at 96.58. In the first half hour of trading after the NFP report was released, the US Dollar Index ticked up to 96.94.
Gold and silver were up immediately after the January Non Farm Payroll Report, but fell $5 and $.10, respectively within the first half hour of trading after the NFP announcement.
Janet Yellen to Testify Before Congress
Janet Yellen will testify before Congress next Wednesday, February 10 where analysts hope to gain further cues about the direction of U.S. interest rates.
Reports that could impact currency movements next week:
Feb 9 Wholesale inventories
Feb 10 MBA Mortgage Index
Feb 10 Crude Inventories
Feb 10 Treasury Budget Jan
Feb 11 Continuing Claims
Feb 11 Initial Claims
Feb 11 Natural Gas Inventories
Feb 12 Export Prices ex-ag.
Feb 12 Import Prices ex-oil
Feb 12 Retail Sales
Feb 12 Retail Sales ex-auto
Feb 12 Business Inventories
Feb 12 Mich Sentiment
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
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