The dollar failed to recover against other major currencies on Monday following Friday’s disappointing US employment data announcement. This was coupled with ongoing tensions between the US and North Korea.
The greenback initially tumbled after the US Labor Department reported on Friday that only 156,000 jobs had been added to the US economy in August from July’s figures. Meanwhile, unemployment rose by 4.4%.
This flew in the face of economists’ predictions of roughly 180,000 new jobs and an unemployment rate of 4.3%.
The United States is considering, in addition to other options, stopping all trade with any country doing business with North Korea.
— Donald J. Trump (@realDonaldTrump) September 3, 2017
The US central bank was expected to increase interest rates for the third time in 2017. It is also expected to start cutting down its $4.2trn (£3.2trn) balance sheet in the third quarter. However, recent events have now thrown this into question.
“The pre-report hype had reached boxing match levels, with dollar bulls portraying the US economy as a prize-fighter gunning for another 200k,” says David Lamb, head of dealing at FEXCO Corporate Payments.
“It missed by a mile – leaving the dollar sprawling on the canvas as both the euro and sterling landed sucker punches”
“In the event, it missed by a mile – leaving the dollar sprawling on the canvas as both the euro and sterling landed sucker punches,” he says.
Oil prices also spiked after Hurricane Harvey knocked out a sizeable chunk of the US’s oil refining capacity. This coupled with an abrupt slowdown in America’s rate of job creation will knock any chance of the US Federal Reserve raising interest rates again this year, Lamb argues.
“After a month of steady dollar strength, it has taken just days to put the greenback flat on its back”, noted Lamb.
“Hours after Treasury Secretary Steve Mnuchin mused about how a weaker dollar could help US exporters, he has got exactly what he wished for. With the detail of this jobs report almost as gloomy as the headline, there is nothing here to support hopes of a quick reversal for the dollar – and the prospect of a further interest rate rise has retreated into 2018.
“Though the European Central Bank (ECB) is trying to talk down the euro with more dovish talk, the single currency is closing in on $1.20, and even the embattled pound is creeping back up to the $1.30 level for the first time in nearly three weeks,” added Lamb.
“Nonetheless, it implies that the euro is not cheap anymore”
Richard Falkenhäll, senior foreign exchange (FX) strategist at SEB, a Nordic corporate bank, comments: “Our long-term fair value estimate suggests that euro/dollar should trade between roughly 1.15 and 1.20. This is by no means a precise measure where the currency pair should trade at any given date. Nonetheless, it implies that the euro is not cheap anymore.”
A softer message from the ECB aimed at avoiding further euro strength is “not that unlikely” at the next ECB meeting, predicts Falkenhäll.
“We think this has the chance to re-establish relative monetary policy expectations as the dominant driver of euro/dollar and support the dollar in the coming months, especially considering the potential for a reversal of current positioning among speculative accounts,” Falkenhäll adds.
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