Week Ahead – Will The Dollar Extend Its Might?

February has been a great month for the US dollar and US stocks. The Dow Jones Industrial Average climbed to record highs and even as stocks pulled back towards the end of the week, the declines were modest given recent gains. Most importantly we have not seen days of back to back triple-digit declines which would be the first sign of sustainable risk aversion. The coronavirus makes central bankers, investors, businesses and every day citizens nervous but investors have been able to look past the virus’s impact.

The US dollar is king because coronavirus helps the greenback – it shines a light on the country’s resilience and draws in safe haven demand. While US data has been mediocre, we haven’t seen extensive deterioration and that alone has been enough to reassure investors that while not immune to China’s troubles, the US economy will outperform. Retail sales rose 0.3% in January, which was right in line with expectations. Ex autos spending growth slowed to 0.3% from 0.6% but this was also in line. The University of Michigan Sentiment Index was stronger than expected despite all of the virus concerns.

Next week the main focus for the dollar will be the Fed. A number of Federal Reserve Presidents are scheduled to speak and the FOMC minutes are due for release. On Thursday, the Federal Reserve announced that starting next week they will be reducing the amount of repos offered. This was in response to the last 3 operations which were oversubscribed as banks seek out cheap funding and this is positive for the dollar because it reduces the availability of cheap money. Looking ahead, we expect US policymakers to downplay the virus impact in the same manner as the markets. Housing and manufacturing numbers are on the calendar and they are not expected to pose a threat to the dollar’s rally. So to answer our own question, the grenback could extend its gain in the week ahead but its also important to realize that the greenback had a strong move in the first 2 weeks of February so a correction within a broader uptrend is also likely.

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