The U.S. dollar traded with a bullish tone since the start of the trading year. While the move higher is not visible on all markets, the most relevant is the EURUSD as the pair eased from 1.23 to 1.20 in less than a month. Because the Euro has the bigger weight in the dollar index, it led to the dollar rallying against other currencies and even against gold.
However, last Friday the USD reversed course. The February NFP report showed that the U.S. economy added 49k jobs in January. While that was positive, as well as the fact that the unemployment rate dropped to 6.3%, the market sold the USD because the December data was revised lower.
What to Expect from the Dollar in the Period Ahead
Last week the world found out that the Euro area economy contracted in 2020 by 6.8% – the largest drop in economic output since the second world war. In contrast, the United States economy contracted only 3.5% in 2020, revealing a sharp discrepancy between the two economies. As such, the bias moving forward is for the dollar to continue to appreciate against the Euro, but not necessarily due the dollar’s strength, but more to the Euro’s weakness.
On other markets, the dollar is mixed. For example, gold is lower on the year. Since the 2020 highs above $2,000, the yellow metal keeps dropping, confirming the strength in the dollar. However, the dollar’s strength is not seen on the oil market or on the stock market prices – crude oil price trades above $57 while stocks are close to all-time highs.
Since the new administration in Washington, the dollar does not look so weak as it did under Trump. The new U.S. Treasury secretary, non-other than Janet Yellen, the former Chair of the Federal Reserve of the United States, already took drastic measures that affect the debt issuance in the months ahead. As such, the dollar’s liquidity may shrink faster than many expect.
The week ahead is light in terms of economic data. Only the CPI in the United States on Thursday may bring some volatility, but the focus will be on the dollar’s move from last Friday – will the reversal continue, or will the dollar push to new highs?
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