The Dollar Took a Strong Pause before a Downhill Run

The U.S. Dollar is strengthening since the beginning of the week. The U.S. Dollar index (DXY) added 0.2% to 105.30 points. But, no one should be impressed with this strengthening after a 1.5% downside during the last week. It rather looks like a strong pause before a downhill run.

The Greenback fell to its lows after Nonfarm Payrolls dropped to 150,000 vs expected 180,000. The unemployment rose to 3.9%, up from 3.8% in September, while hourly earnings were up by 0.2% YoY missing expectations at 0.3% YoY. Colling U.S. labour market sent U.S. 10-year Treasuries to 4.48%, the lowest since September 25. The S&P 500 index jumped by 1.3% to close the best week of 2023. The DXY index lost 1.0% on November 3. This data explains dovish rhetoric of Federal Reserve’s (Fed) Chair Jerome Powell last Wednesday, as he probable new these figures by then. He may also understand that the Q4 2023 could be even worse despite strong Q3 GDP at 4.9% QoQ. Atlanta Fed GDPNow modeling suggests that Q4 2023 GDP could slow down to 1.2% QoQ. This would slow down inflation pressures without Fed to interfere.

However, geopolitical risks may downplay this bright picture, as soaring crude prices would create additional pressures on prices. Thus, the Fed has left an opportunity to raise its interest rates if needed. This week Powell will testify to the Congress and may repeat his dovish rhetoric. The Greenback in this case would resume to the downside starting this Wednesday. But, it is important not to be too much distracted by the “weak Dollar” as it may reverse at any moment. Capital inflows in the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) demonstrates that large investors continue to allocate funds betting on a strengthening Greenback.