In a recent post I wrote about how the dollar may be headed for a long term decline. Now it appears that, for the moment at least,I may have spoken too soon…
Those people who believe that Forex trading should all be technical and never fundamental certainly got their point across yesterday as the dollar rallied against all major currencies:
- The euro went to $1.4949 from $1.5075
- The Dollar went to Y89.80 from Y88.22 as the Japanese currency retreated against the dollar for the first week since October.
- The dollar also gained against the Swiss Franc, going to CHF1.0098 from CHF0.9999
- Against the major currency index, the dollar went to 75.331 from 74.629.
This happened in the wake of positive jobs market data for November. The US economy lost just 11,000 jobs while analysts estimated that the number will be much higher, around 125,000. The Jobs market data for October and September was adjusted to reflect lower job losses for those months as well. The unemployment rate actually decreased in November to 10% from 10.2%.
Now, it doesn’t say that the American Economy is out of the woods just yet. After all, jobs are still being cut, but it is a very good sign for the future.
The data prompted analysts and investors from around the world to adjust their prediction as to the future interest rates in the US. While the FED has made it clear in earlier statements that the near-zero interest rates may last for quite a while now, the new data has raised the chance that the FED will begin to raise interest rates as early as this summer.
The FED Fund Future, which reflect the level of market expectations for future interest rates gave a 53% chance that the FED will increase the interest rates by 0.25% in the summer, an increase of more than 15% from a week ago.
As is always the case, higher interest rates usually spell a higher dollar. This is why the dollar rallied so handsomely.
It is worthwhile to note that all during the financial crisis, the dollar usually weakened whenever there was a feeling that the economy was improving. Now it rallied despite the good data. Whether or not this is a shift in market and traders’ behavior is something worth exploring and looking out for in the coming weeks.
