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US dollar gives up early gains after disappointing jobs report

us dollar index

The US dollar is giving up some of its early gains during today’s forex trading action after the Labor Department revealed a disappointing jobs report covering the month of May, with employment numbers falling below economists’ estimates for the month.

Until today, the value of the greenback – as tracked by Bloomberg’s dollar index – is accumulating a 0.25% weekly gain against a basket of currencies with the benchmark apparently bottoming at 89.535 on 25 May while as it has advanced 0.7% since then.

A sustained climb in US Treasury yields this week has supported this latest uptick in the greenback, with 10-year yields moving 5 basis points higher at 1.634% so far during this morning’s bond trading action as weakness in the jobs market could delay the Federal Reserve’s decision to taper its asset purchases.

According to data from the Labor Department, the US economy created 559,000 jobs during May while economists surveyed by Dow Jones were expecting a total of 667,000 new positions during the period.

Earlier this week, the Federal Reserve’s beige book revealed that governors from most of the central bank’s branches reported a sustained climb in prices while corporate leaders in their respective jurisdictions indicated that they expect to raise the price of their goods and services in the near future.

Meanwhile, strong economic data including an above-expected reading in the US IHS Markit Manufacturing Purchasing Managers Index (PMI) and a lower number of jobless claims compared to the market’s estimates may have provided some support for the dollar to move higher, even though inflation concerns continue to cap the advance of the greenback.

Michael Hewson from CMC Markets UK anticipated a decline in the greenback if the jobs report failed to live up to expectations as it did. In a note to clients sent yesterday, the analyst wrote: “Yesterday’s U.S. dollar rally suggests an expectation of a strong beat on the headline number, as well as a big upward revision to the April number”.

However, he added: “Anything less than a big beat on both could well see the U.S. dollar slide back”.

The Australian Dollar and the British pound are leading the scoreboard against the North American currency this morning as they are advancing 0.5% each, followed by the Japanese yen and the Swiss franc, which are jumping 0.4% after the announcement. Notably, the euro is lagging behind its peers as it is only gaining 0.2% against the US dollar this morning.

Some analysts have highlighted the bumpy nature of the recovery as a challenging situation when it comes to forecasting where the dollar may land in the following months as the COVID-19 situation continues to weigh on the pace at which the global economy will be recovering.

In this regard, Matt Weller from City Index stated in a note to clients: “The month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts”.

What’s next for the US dollar?

us treasury yields - us dollar
US 10-year Treasury Yields chart – 1-day candles with multiple indicators – Source: TradingView

At this point, there are two catalysts that should be driving the direction of the dollar in the coming months. The first is economic data since evidence that the US economy is recovering strongly from the pandemic fallout should lead to an eventual tapering of the Fed’s multi-billion asset purchases – a scenario that should reduce inflationary pressures, increase yields, and drive more demand toward the greenback.

The second catalyst is a negative one and it is associated with a weaker economic outlook as that could delay the Fed’s decision to taper and, therefore, inflation could run higher. In this scenario, the purchasing power of the dollar will suffer and that should depress the value of the currency against its peers.

Rather than focusing on the technical situation of the US dollar, I prefer to look at US Treasury yields for indications of where the greenback might be heading. The chart above shows that yields have taken a pause after the sharp rally that took place since the beginning of the year – back when the US started to ramp up its vaccination program.

This pause has resulted in the formation of a bull flag – a continuation pattern that could be signaling an upcoming resumption of the latest uptrend.

If that happens, we could see the 10-year yield climbing to pre-pandemic levels pretty soon, possibly once the United States fully recovers from the fallout caused by the health crisis. For now, the outlook for the dollar remains bullish as long as the economy keeps bouncing.

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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.