With A Million New Jobs Looming, Why Can’t The Dollar Rally?

Dollars, Currency, Money, Us Dollars, Franklin

The U.S. dollar kicked off the first trading day of May with broad based losses. On Friday, U.S. non-farm payrolls are due for release and with the labor department expected to report a million new jobs, some investors are wondering why the U.S. dollar is unable to rally. With one of the world’s best vaccination rates, stimulus checks and rollback on restrictions, the U.S. is not only recovering rapidly but emerging as the world’s leading engine of growth.

The biggest problem for the dollar is that on its most fundamental level, the greenback is a safe haven currency. The U.S. led the recovery since the beginning of the year, so investors had plenty of time to buy dollars and take profits. Now, vaccination rates are rising in Europe and they are looking to ease restrictions. The first quarter was the U.S. recovery trade but the second to third quarters should be focused on the global recovery. Strong global growth is generally more positive for high beta currencies than safe haven currencies like the U.S. dollar. When Eurozone nations finally rollback restrictions and show stronger data, there will be renewed interest and demand for the euro. The recent weakness in the dollar is a reflection of investors getting ahead of this trading opportunity.

Add to that the Federal Reserve’s insistence that substantial progress has not been reached and an unexpected decline in the manufacturing ISM index and we can see why the dollar refused to rally despite the prospect of a very strong jobs report on Friday. Economists were looking for the ISM manufacturing index to rise to 65 from 64.7 but it dropped to 60.7 in April. According to the details of the report, it is high prices and supply shortages that set back activity instead of demand but yields declined. The ISM services and non-farm payrolls report are still expected to show a red hot recovery. The dollar should respond positively to these reports, but as the global recovery becomes the bigger story, demand for U.S. dollars will wane.

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