Dollar Rally Gains Momentum In New Trading Week

As we kick off the second week of January, the greenback extended its gains against all of the major currencies. Despite the first month of job losses in April, the uptick in manufacturing and service sector activity combined with the jump in wages last month renewed demand for US dollars. Vaccine optimism is going a long way in shielding the economy from a winter downturn. Treasury yields are moving upwards with 10-year rates rising to their highest level since March. All of this tells us investors are starting to believe that the central bank is overly dovish and the economy will recover faster. In fact, Federal Reserve President Bostic said the central bank is not locked into a paradigm and could change their outlook. It's far too early to predict a change of course but when there is a recovery, the US will enjoy one of the strongest.

10 and one 10 us dollar bill

Image Source: Unsplash

For now, the greenback caught a safe-haven bid with the sell-off in stocks driving all high beta currencies lower. The dollar had also become grossly oversold as stocks extended to record highs. A natural correction was bound to occur especially as investors look to Friday’s US retail sales report. The sharp uptick in wages, rise in gas prices, and week-to-week jump in chain store sales suggests that the report will be lifted by strong year-end holiday shopping. Good numbers would reinforce the dollar’s recovery.

The New Zealand and Australian dollars were the worst performers as the currencies with the strongest gains experienced the deepest pullbacks. AUD/USD traders shrugged off stronger retail sales and higher inflation in favor of risk aversion. Chinese inflation data was also hotter than expected. Meanwhile, the slide in the Canadian dollar was supported by lower oil prices, last week’s weaker IVEY PMI, and employment reports. With no major economic reports scheduled for release from commodity-producing countries this week, risk appetite will drive demand for those currencies.

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