What’s Driving Dollar Gains in Early NY Trade

The US dollar extended its gains against all of the major currencies this morning. Some market watchers are attributing the dollar’s rise to President Trump’s support for the greenback because in an interview this morning with Fox News he said “it’s a great time to have a strong dollar.” However the truth of the matter is that the currency is rising for other reasons because Trump’s dollar outlook has no real impact on its direction.

Instead, investors are still reeling from the Federal Reserve’s perspective on negative interest rates. Fed Chairman Powell made it clear on Wednesday that negative rates are not on the table because their effectiveness is questionable and the central bank has other tools. Risk aversion is also lifting the greenback with Dow futures down another -200 points, adding to yesterday’s -500 point decline.

Tensions between US and China continue to grow with the White House looking at US fund investments into Chinese companies and now, the accounting practices of publicly traded Chinese firms. China on the other hand could block US pension fund investment. None of this is good for the markets or global growth and that sentiment contributes to the sell-off in stocks. Jobless claims rose more than expected, adding fuel to the decline in equities. Unfortunately the gains in the next 24 hours could be modest as Friday’s retail sales report should be very weak with the ongoing shutdown in April leading to continued contraction in demand. The University of Michigan’s consumer sentiment index is also scheduled for release and while sentiment is expected to deteriorate further, the decline may be moderate as states begin to reopen.

The Bank of England is also not interested in negative interest rates according to Governor Bailey. There’s no question that the central bank will ease further, most likely by boosting asset purchases but the “markets have calmed down in past few weeks” and the “UK financial system can handle more stress.” Most importantly, they fear that negative rates would create problems for banks, which is a view the Fed probably shares as well. Sterling is trading lower against the greenback despite the BoE’s outlook on negative rates. Meanwhile the US dollar’s rally drove EUR/USD below 1.08. Economic data from the region was mixed with France reporting an improvement in their unemployment rate and Germany reporting lower wholesale prices in April. First quarter GDP numbers are due on Friday and a steep contraction is expected.

The weakest currency is the Australian dollar. Approximately 594,000 jobs were lost in the month of April, worst ever for Australia. More than 220K of those were full time, the rest part time. The unemployment rate rose to 6.2%, which was less than the 8.2% forecast but the smaller increase is understated by Australians leaving the work force completely. Consumer inflation expectations also declined but at the end of the day, deteriorating US-China relations is one of the primary reasons for A$ weakness. Chinese industrial production numbers are due for release this evening, which should have a significant impact on the currency.

The decline in the New Zealand dollar is expected considering the dovishness of the Reserve Bank. However, the government unveiled a $50 billion fiscal stimulus package to support the economy and help ease the RBNZ’s burden. Manufacturing PMI numbers are scheduled for release tonight and due to the lockdown, we are looking for manufacturing activity to fall sharply in March and April. No data was released from Canada but the rise in oil prices has not stopped USD/CAD from rallying 4 days in a row.