Dollar Struggles as Rate Disbelief Lingers, Euro and Yen Gain Ground
Fundamental Forecast for Dollar:Neutral
- EURUSD and USDJPY present the most pertinent motivators for Dollar movement and both have weighed the Greenback
- A long list of data releases is topped by the April NFPs while the round of Fed speakers will attempt to thaw rate hike doubts
- See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page
The Dollar dove to end this past week at its lowest level in 11 months. The extension of the currency’s slide from its 13-year high set back in late January (now down over 4.5 percent) was fueled by a distinct loss of traction in rate forecasts. Much of the Greenback’s advance these past years has been founded in one way or another from this projected yield advantage. As that fundamental lead eases, the currency loses lift. The question is how much of its lead will be lost to unfavorable winds? That is just as much a statement on the Dollar’s counterparts as it is reflection of the Federal Reserve’s course. There will certainly be plenty of mileposts throughout the coming week to shape speculation. And, if the tentative slip in risk trends gains purchase; we may find the dormant haven status finally return.
Looking back to this past week, I was expecting the Dollar to stabilize and even regain some lost ground on the basis that moderation from the central bank’s tone and/or softening of US growth would be discounted; and the currency would benefit from the fundamental disadvantage of its counterparts. However, the substantial strengthening of the currency’s primary crosses – the Japanese Yen and Euro –significantly overpowered the passive appeal in the Dollar. In the week ahead, the collective course of these crucial peers may exact as much influence on the Greenback’s course as its own fundamental docket.
To assess how much cross-currency pressure afflicts the Dollar, there are two factors to consider: the influence (liquidity) of the counterpart and its momentum. The Euro easily dominates the field of counterparts. Where, according to the BIS triennial report, the US Dollar is on one side of 87 percent of the world’s currency exchanges (so total of 200 percent); the Euro was second at 33 percent. When the Dollar is adrift, an engaged Euro can render the most indirect influence. With EUR/USD just below 1.1500 – the general zone of resistance back to the start of 2015 – the pressure is material. The Eurozone 1Q GDP report this past week set out a noteworthy beat and put the aggregate economy back above the level that it stood before the recent crisis. Yet, the performance is uneven and a solid foundation for appreciation is proving difficult to register.
The Japanese currency poses the greater threat to the Greenback. The rapid swell in the Yen this past week was a response to the recognition that the BoJ was not going to back shorts with the upgrade in accommodation they were expecting. Further advance for JPY would more likely come through failing confidence in the central bank’s ability to influence its exchange rate which in turn sees deleveraging of exposure aimed at front-running the BoJ and/or collecting the modest carry still left in the pairs. Genuine and market-wide risk aversion would be the more capable mode for this effort, but that would see the Dollar regain its haven status amongst other crosses – likely including the EUR/USD – and the Greenback would find a net inflow and advance.
While crosswinds from other currencies and the ever-foreboding sentiment collapse can lever a passive Dollar, the Greenback can also take charge of its own course. The fading interest in the US monetary policy advantage can be recharged if the event risk can override the market’s skepticism. Both data and Fedspeak will offer an opportunity to shake rate speculation to life. There is a long list of data including sentiment surveys, trade, factory and service activity, housing and credit; but the real weight rests with the April labor report on Friday. The wage figure is where the data still has room to lift the hawks. Fed officials may also maintain their effort to bridge the gap of market skepticism. As of Friday, there are 9 individual speeches scheduled and one panel. Will the market continue to ignore a persistent commitment to 50bps of hikes in 2016 or will belief start to creep in?
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