US dollar update


Recent developments in the foreign exchange market have been influenced by speculations regarding the Federal Reserve’s (Fed) interest rate policies and actions taken by the European Central Bank (ECB). The US Dollar has struggled to gain momentum due to growing expectations that the Fed will commence interest rate cuts starting from the September meeting. This sentiment has been reinforced by recent economic data, including weaker-than-expected JOLTS Job Openings for April, and a significant reduction in the ADP Employment Change for May. Additionally, the number of initial jobless claims for the week ending May 31 rose to 229,000, surpassing both estimates and previous figures, indicating a potential easing in labor market strength.

The 10-year US Treasury yields have shown some recovery to 4.30% but remain below the previous week’s high. Consequently, the US Dollar Index (DXY) has been hovering around the 104.00 mark.

The European Central Bank has taken a more active stance by implementing a 25-basis point rate cut. However, the ECB also raised its inflation targets for the current and next year, indicating a cautious approach towards inflation management. This move by the ECB, coupled with a slightly improving Eurozone outlook, has supported the euro, putting additional pressure on the US dollar. European Central Bank governors consider another interest rate cut in July improbable, shifting their focus to the September meeting.

Overall, the dollar index has stabilized around 104, but it is poised to record a weekly loss of approximately 0.5% due to mounting expectations of Fed rate cuts driven by signs of a softening US labor market. Investors are currently betting on a total easing of 50 basis points by the Fed this year, with the first cut anticipated in September. Market participants are keenly awaiting the US Non-farm Payrolls (NFP) data for May, which is expected to provide further insights into the labor market’s health. Consensus estimates suggest that around 185,000 new nonfarm jobs were added last month, with the unemployment rate expected to remain steady at approximately 3.9%, and a slight acceleration in wage growth on a monthly basis.


Market Views & Opinions

ING at today’s ‘FX Daily: Dialling back phase’ article concludes regarding the USD section:

“We are bearish on the US dollar this week. However, so far it is bravely resisting further weakness. DXY has touched 104.0 for the moment, which seems like a key level for now. Today’s payrolls could potentially be a trigger on the way down, but the move in recent weeks is already so impressive that we’ll need a real reason to go down that route.”

According to today’s Reuters article (‘Dollar languishes near 8-week low ahead of payrolls test’ by Kevin Buckland), Joseph Capurso, head of international economics at Commonwealth Bank of Australia, anticipates that the overall message from the Non-Farm Payrolls report will indicate strength, though slightly diminishing. He suggests that market expectations for the Federal Open Market Committee’s first rate cut in September may be delayed, which could lead to a modest increase in the USD.



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