US Dollar: Stronger levels ahead of CPI – MUFG

MUFG’s Lee Hardman notes the US Dollar has rebounded, lifting the Dollar Index back above 102.00 after post-election losses. Stronger US labour market data and higher employment growth have shifted the Federal Reserve’s focus toward upside inflation risks.

Dollar strength driven by labour data

"The US dollar has continued to trade at stronger levels overnight after rebounding strongly at the end of last week. It has resulted in the dollar index rising back above the 102.00-level after hitting a low of 101.10 on 4th November just after the release of the US mid-term elections results. The US dollar has quickly reversed all of its post-election losses encouraged by the release of further evidence showing that the US labour market continues to strengthen this year."

"Overall, the report provides further evidence that the US labour market is continuing to strengthen alongside stronger economic activity in recent quarters which will encourage the Fed to tighten policy further. However, with the risk of second round inflation effects from the labour markets still appearing contained the report does not significantly increase pressure on the Fed to speed up plans for hikes helping to dampen upward pressure on US yields and the US dollar."

"Market participants and the Fed will be watching closely for evidence of spillover effects from higher energy prices in the latest US inflation data released this week."

"The US dollar appears to be running ahead of short-term yield spreads indicating that a hawkish surprise maybe required to maintain US dollar strength.