The Dollar’s Rebound Fades Away

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After the end of last week’s rebound, the dollar remained near its three-year lows as rising U.S. wage inflation data was unsuccessful in suppressing uncertainty among investors regarding the greenback’s outlook.

Friday’s strong U.S. jobs report revealed that wages were growing at their fastest pace in nearly nine years, resulting in a rebound for the dollar as well as increasing the odds of more tightening by the Federal Reserve than markets have estimated.

While stocks fell on Monday and bond yields rose, analysts said the influence on the straining dollar was not.  Manuel Oliveri, an FX strategist, said the dollar was not acting “straightforwardly”, partly due to real-money investors remaining underweight other regions.

Typically, as the American economy continues to improve, and U.S. interest rates are forecast to rise three times in 2018, would lead to a stronger dollar. But the greenback has struggled to gain.

“In order to make the case for a sustainable upturn in the dollar, you need to see a real change in capital flows,” said Oliveri, citing that data on those flows lead to a stronger euro, which gained 7.2 percent since November against the dollar.

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The dollar index, measured against a basket of six major currencies, barely moved at 89.202 on Monday after Friday’s 0.6 percent gain.  Versus the euro, the dollar lingered at $1.2455, against last week’s three-year low of $1.2538.

The dollar fought to retain its gains versus the yen, dropping 0.4 percent to 109.74 yen after reaching 110.485 yen on Friday. The greenback remains higher than the four-month low reached on Jan. 26 of 108.280 yen.

Analysts widely expect the euro to gain against the dollar, some see the reappearance of the U.S. currency sensitivity to domestic economic news.

“Will the market really recognize the error of its ways – i.e., the excessive dollar weakness – and correct it all of a sudden? That would be too good to be true,” bank analysts said. “However, following the wake-up call of the labor market report, the market might at least focus more on US economic data again.”

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