The latest display of strength in the US labor market is breathing new life into the US dollar divergence trade.
A broad measure of the greenback extended a rebound from its weakest level since June after Friday’s report on last month’s job growth trounced forecasts and bolstered bets that the US Federal Reserve would raise interest rates this year. Traders now see about a 47 percent chance of a hike by December, up from about 35 percent at the end of last week.
The Fed speculation revives a scenario favored by dollar bulls, where the US central bank moves toward tightening policy as other central banks add stimulus to bolster flagging economies. Case in point: The Bank of England (BOE) cut interest rates this week for the first time in seven years, turning the pound into the biggest loser versus the greenback among major currencies.
“We’ve been long-term bullish on the dollar and we continue to be,” said Kathy Jones, New York-based chief fixed-income strategist at Charles Schwab & Co. “This number should push us more towards a rate hike and more divergence.”
The Bloomberg Dollar Spot Index, which tracks the currency against a group of major peers, rose 0.4 percent this week. The greenback gained 0.8 percent to US$1.1086 per euro, but slid 0.2 percent to ￥101.82.
The US currency index is still down almost 4 percent this year, upending expectations at the start of the year that the US dollar would strengthen for a fourth straight year. Those forecasts faltered as financial market turmoil and the UK referendum on membership in the EU led the Fed to forgo hiking rates again, following liftoff from near zero in December.
The labor report is welcome news for hedge funds and other large speculators in the futures market, who boosted bullish wagers on the US dollar the past four weeks, data from the Commodity Futures Trading Commission show. Bets the greenback will rise outnumbered bearish wagers by about 149,000 contracts in the week to Aug. 2, the most since February.
The US currency is projected to strengthen to US$1.08 per euro and ￥105 by the end of the year, according to the median forecasts in Bloomberg surveys of analysts.
“We’ve seen ongoing divergence for some time now,” said Eric Viloria, a currency strategist at Wells Fargo Securities LLC in New York. “It never really went away. We see today’s solid payrolls data as supportive of a resumption in Fed interest-rate hikes, and we expect the US dollar to remain supported in the near term.”
In Taipei, the US dollar fell against the New Taiwan dollar on Friday to close at NT$31.57, down NT$0.14 from Thursday and NT$0.356 on Friday last week.
A rebound by other regional currencies, including the South Korean won, and strong foreign institutional buying in Taiwanese stocks gave an additional boost to the NT dollar, dealers said.
Meanwhile, the pound slid 1.2 percent this week to US$1.3069 as of 5pm on Friday in London, having tumbled 1.6 percent on the day of the BOE announcement. That is still higher than the 31-year low of US$1.2798 reached on July 6. Sterling dropped for a third week versus the euro, losing 0.4 percent to ￡0.8478.
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