US Dollar Still 'Drifting', Where is the US Dollar Going?


 On Monday, the US dollar continued the decline experienced last week which was the biggest drop since July after the Federal Reserve reduced its 'hawkish' rhetoric and US jobs data showed signs of slowing.

The US dollar index was hovering around a 6-1/2-week low of 104.84, after falling about 1.4% last week. The euro strengthened 0.09% to a 7-1/2-week high of $1.0738.

World stocks also had their strongest week in a year last week on expectations that the Fed had finished raising interest rates. Other indicators such as weak US jobs data, softer output data, and lower long-term bond yields also negatively impacted the US dollar, while encouraging sterling and the Aussie dollar to rise, and causing the yen to strengthen from a low of 150 per US dollars.

Dane Cekov, chief FX strategist at Nordea, viewed last week's move as an "overreaction", while saying jobs data was "mixed". "You can still see a relatively weak US dollar in the short term, but if the euro-dollar rise continues, it should find support from other data."

The latest growth and inflation data from the eurozone and a manufacturing survey from China bear that out.

Concerns about a recession in the European zone were seen as more worrisome on Monday after studies showed a decline in business activity accelerated last month with weak demand in the services sector.

"The last PMI released today is consistent with our forecast that the GDP of the European zone will shrink further in the 4th quarter," said Capital Economics Europe economist Adrian Prettejohn.

The findings show an around 80% chance that the European Central Bank will cut rates by April and around a 90% chance that the Fed has ended rate hikes, with an 86% chance that the Fed's first move to ease policy will come as early as June.

Fed Chairman Jerome Powell, who spoke of balanced economic risks, sent short-term bond yields lower last week, with further declines after weaker US data.

The two-year bond yield has declined by 25 basis points in just over two weeks, while the ten-year bond yield remained at a five-week low and last stood at 4.593%.

The Japanese yen slipped 0.2% to 149.62.5 per US dollar. Nordea's Cekov said the yen may need to be in the area of 155 per dollar for Japanese authorities to consider intervention or to discuss the currency.

Sterling strengthened 0.4% to $1.2425. British GDP data for the third quarter is due this week and although the pound has rallied strongly in the past week in a very short market in the currency, it is still down about 5.5% since the July peak.