Dollar Rally to Three Year Highs Only Accelerates as Taper Fear Rise
Fundamental Forecast for US Dollar: Bullish
-
NFPs beats, jobless rate holds, Taper fears remain
-
Manufacturing and Service sectors take divergent paths, and so does their hiring trends
-
USDollar clears another round of heavy resistance to trade at three-year highs
The dollar was the clear winner this past week. The benchmark reserve currency climbed against all of its major counterparts over the period while the Dow Jones FXCM Dollar Index (ticker = USDollar) extended its impressive rally to a third week as it move to three-year highs. Meanwhile, the market’s greatest threat moving forward – the possibility of a mass deleveraging sparked by risk aversion – poses a significant bullish ramp for the safe haven greenback should such fears befall the speculative ranks. That is not to mean that counter-trend corrections aren’t possible – idle markets are a passive risk to the currency’s incredible momentum – but the headline and unpredictable developments that threaten to creep in are distinctly supportive of the current run.
First and foremost, the greatest contribution to the dollar’s rally to this point – and thereby our active concern for the week ahead – is the growing acceptance that the Federal Reserve is on pace to reduce its monthly stimulus purchases (from $85 billion) by September. Aptly named the ‘Taper’, such an eventuality holds significant influence over the performance of the markets moving forward. Over the past four years, the capital markets have soared despite uneven growth, tepid investment turnover and historically low rates of return. While initially this move was directed by a reinvestment after the Great Recession and Financial Crisis of 2007-2008, it transitioned into a move fed by an elemental aspect of investment: greed. Stimulus championed by the Fed drove lending rates to record low and led investors to believe that risk was all but eliminated. Yet, that collective faith fed by moral hazard has been shaken by fear of the Taper.
When Fed Chairman Ben Bernanke remarked in the press conference following the June rate decision that tapering can begin later this year and end by mid-2014, it was a clear shift in the benchmark outcome for the bank’s next move. Since then, we have not seen anything to deter theTaper time table that has become the consensus. Scheduled speeches by Fed officials have tried to temper the reactions to the expected outcome, but they have clearly not contradicted the forecast. This past week, the June employment data accomplished the same. More important than the payrolls change, the Fed is targeting the unemployment rate; and that was where the market was looking. The 7.6 percent print didn’t tick lower as expected, but it is just off the lowest level in four years.