Societe Generale’s Kit Juckes notes that recent US labour data have broken the prior FX range, challenging expectations for a weaker Dollar under President Trump. He argues that stronger US growth, rising rate-hike talk from the FOMC and higher inflation risks could undermine the Dollar debasement narrative, even as Europe and Asia struggle with energy prices.

US data revive Dollar resilience theme

"The data were sufficiently strong, however, to challenge the view that President Trump can deliver lower rates and a weaker dollar."

"However, there has to be a risk that the dollar debasement theme is called into question as more FOMC members start talking about the need to raise interest rates at some point, while European and Asian economies struggle with energy prices."

"Add to that mix clear evidence that the US’s energy-rich economy is weathering the storm much better than those of Europe or Asia, and it is very hard to believe either that President Trump can have a weak dollar simply because he wants one, or that Treasury yields are going to meekly fall back."

"Throw in the danger stemming from a stalemate in US-Iranian negotiations, which threatens to lead to a protracted period of limited oil flows through the Arabian Gulf, and we have all the makings of persistently higher inflation, with all that could imply for bond yields."

"The FX market has been stuck in a stifling range for weeks, as the US economy has shown signs of holding up much better than those of Europe or Asia, while relative interest rate trends have moved in the opposite direction. All that changed with Friday’s US labour report, when employment increased by 120,000 rather than the 89k that ‘Mr Consensus’ was expecting."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)