U.S. dol­lar – fur­ther sell-off, or set for a re­bound?

Financial Mirror (Cyprus) - - FRONT PAGE -

The dol­lar’s weak­ness and a surge in safe havens were the cen­tral themes in the mar­kets last week. The dol­lar in­dex fell 1.4% in the past five trad­ing days, tak­ing the over­all losses to 10.8% for the year so far. With mar­ket ex­pec­ta­tions of a U.S. rate hike in De­cem­ber fall­ing be­low 40%, ac­cord­ing to CME’s FedWatch, it ap­pears that in­vestors be­lieve the tight­en­ing course for 2017 is over. Even Bond mar­kets are show­ing more pes­simism, with U.S. 10-year trea­sury yields drop­ping to 2.02% on Fri­day; the low­est since Trump’s elec­tion.

De­spite the ex­ten­sion of the debt ceil­ing for three months and Fed of­fi­cials be­ing op­ti­mistic about the econ­omy, the green­back still failed to rally. The res­ig­na­tion of the Fed Vice Chair, Stan­ley Fis­cher, is likely to be play­ing a sig­nif­i­cant role in keep­ing the dol­lar un­der pres­sure. His depar­ture leaves four of the seven Board of Gov­er­nors’ seats va­cant, mean­ing that Trump can re­shape the Fed’s pol­icy, if he de­cided to bring more doves into the cen­tral bank. It’s prob­a­bly still too early to start spec­u­lat­ing, and we will have to wait a lit­tle longer for clar­ity, when Trump nom­i­nates new gov­er­nors. How­ever, Fis­cher’s res­ig­na­tion will re­main a neg­a­tive fac­tor for the dol­lar in the weeks and months to come.

Hur­ri­canes Har­vey and Irma are now ex­pected to cost the U.S. econ­omy up to $290 bln, ac­cord­ing to the lat­est es­ti­mates from Ac­cuWeather. While nat­u­ral dis­as­ters have an im­me­di­ate neg­a­tive im­pact on the econ­omy and will be re­flected in Q3 and Q4 GDP fig­ures, the long run will see an up­lift in growth due to spend­ing on in­fra­struc­ture and re­build­ing; how­ever, it’s dif­fi­cult to as­sess the ex­act short and long-term im­pact on U.S. growth.

North Korea’s de­ci­sion to hold a cel­e­bra­tion in­stead of launch­ing an­other nu­clear bomb, helped risk as­sets and the dol­lar to re­cover slightly early Mon­day, with safe havens such as the gold, yen, and the Swiss franc feel­ing most of the pres­sure. Com­ments from North Korea’s for­eign min­istry ear­lier Mon­day, stat­ing that “the forth­com­ing mea­sures to be taken by the DPRK, will cause the U.S. the great­est pain and suf­fer­ing it had ever gone through in its en­tire his­tory,” were not taken se­ri­ously. How­ever, ten­sions will likely es­ca­late fur­ther, if the U.S. is suc­cess­ful in im­pos­ing new sanc­tions. That’s why the gains in the U.S. dol­lar and fall in safe havens are likely to be lim­ited.

On the U.S. data front, con­sumer prices and re­tail sales are of great im­por­tance, with the FOMC meet­ing to fol­low next week (Septem­ber 20). De­spite in­ter­est rates re­main­ing un­changed, and the only new an­nounce­ment likely to be the be­gin­ning of the bal­ance sheet re­duc­tion, the CPI fig­ures will shape the ex­pec­ta­tions for De­cem­ber’s meet­ing. Ris­ing gaso­line prices will likely push head­line in­fla­tion higher, from 1.7% to 1.8% YoY. How­ever, core in­fla­tion should be given spe­cial at­ten­tion, as any up­side sur­prise will lift De­cem­ber’s rate hike ex­pec­ta­tions above 50%, thus, pro­vid­ing the dol­lar short-term re­lief.

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