Investors dumped the US dollar on Friday after US jobs data came in well short of estimates and cemented expectations for lower US interest rates. In the coming months, the greenback might maintain its value based on safe haven inflows and looser monetary policies in other parts of the world.
The US Dollar Index plunged to a 10-week low of 96.59 on Friday after the Bureau of Labor Statistics announced jobs growth of only 75,000 for the month of May — less than half of the market forecast of 177,000.
Adding insult to injury was the figure for earnings growth, which matched April’s growth of 0.2 percent but which failed to meet the market’s expectation of 0.3 percent.
Ahead of the release, Friday’s data was billed as a potential “game changer,” with any hope of averting Fed rate cuts reliant on some very solid numbers.
Alas, data has now cemented expectations for at least two Fed cuts this year, which means, as far as central bank monetary policies go, that it’s now officially a race to the bottom.
Per the CME’s FedWatch tool, the Fed is now 80 percent likely to cut interest rates in July.
Other major central banks have already begun cutting rates, including the central banks of Australia, New Zealand and India, and although the European Central Bank refrained from cutting rates into negative territory on Thursday, it said it now expects no rate increase until at least the middle of 2020. Meanwhile, the Swiss National Bank and Bank of Japan have reaffirmed their commitments to extremely loose monetary policies.
The dovish shift by central bankers globally has been relatively sudden and dramatic and could not have been predicted at the end of 2018 when most economists filled their research reports with predictions based upon much higher interest rates and the “end of cheap money.”
Taking a great deal of the blame for the global economic downturn is US President Donald Trump, whose trade policies have set a ball rolling that could wipe $455bn from global output — a number that will only increase if further trade tariffs are introduced on goods coming from China, Mexico and potentially from Europe.
For the US dollar, the near-term outlook isn’t as straightforward as it could be.
Although interest paid on dollars will fall this year, the same is true for other major currencies whose respective economies are arguably in worse shape than the US, and that removes much of the incentive for selling dollars. Simply, investors are asking themselves what currency alternatives there are, and are coming up with few answers.
This also explains why, as Societe Generale notes, “the [recent] change in both Fed rhetoric and … market expectations really hasn’t done that much to undermine the dollar” — only a week ago the Dollar Index was testing a 2-year high.
The greenback will also continue to attract safe haven inflows. For now, investors will view the greenback as more likely to maintain value than the Canadian, Australian and New Zealand dollar currencies, and the pound, too, unless a soft Brexit or Article 50 revocation is achieved soon.
“I think it is the US dollar that is going to be the asset of choice for many investors now in terms of safe havens,” Rabobank’s Jane Foley told Reuters this week.
For the most actively traded dollar pair, EUR/USD, a slightly higher exchange rate (a slightly weaker dollar) is expected in a year’s time according to the latest Reuters poll, but these expectations are the lowest they’ve been since August 2017. Analysts now expect the euro to buy only $1.17 in mid-2020 — only 3.4 percent more than Friday afternoon’s quote of $1.132.
As part of its revised USD forecasts, HSBC said in late May to expect dollar strength relative to the Australian dollar and New Zealand dollar, and against riskier emerging market currencies.