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Dollar Weakens as Stimulus Prospects Validated By Yellen

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November 17, 2013 By: , No Comments

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The US Dollar is starting to reverse some of the gains seen earlier this month, as comments from the nominee to be the next Chairman of the US Federal Reserve suggested that stimulus programs could extend through the end of this year.  Specifically, public statements from Janet Yellen suggest that the majority of the voting body at the Fed is not overly anxious to begin cutting back on QE stimulus programs.  This has helped to soften some of the fears seen back in September when the market consensus was calling for a $10-15 billion reduction in the Fed’s monthly purchases of Treasuries and mortgage backed securities.  This, of course, did not actually come to fruition and the Dollar quickly began a downtrend against the Euro, Australian Dollar and Pound as investors were willing to take on added risk in exchange for higher yields.

This downtrend reversed in October, however, as economic data started to show strength in the US economy relative to its developed market counterparts.  Most of this strength came as a result of better than expected employment figures (the all-important Non Farm Payrolls), and improvements in quarterly GDP that was also much better than analyst estimates.  Last month’s Non Farm Payrolls actually came in at nearly double the market’s expectation at more than 200,000 new jobs.  It is pretty rare for the market estimates to be wrong by such a large amount, so the surge in the Dollar was not entirely surprising.   This was matched by improved GDP for the third quarter, which came in at 2.8% versus the market expectation of 2.0%.  This is another relatively large miss when comparing the actual numbers to the market expectations, so these positives are likely to keep the Dollar supported through the rest of the month.

Gains in AUD, GBP

Dollar rallies have taken a breather in the last dew trading sessions, however, and gains in the Australian Dollar and British Pound have been posted as a result.  Suggestions of prolonged stimulus are a positive for high-yielding (risk) currencies, so the Yellen comments last week brought in a needed downside correction in the greenback.  In addition to this, last week’s US economic data went a ways to hurt sentiment.  Specifically, regional manufacturing data and industrial production figures came in lower than expected, so this shows that the broader recovery seen in GDP and the labor markets still has some areas of weakness.

Going forward, forex traders will be looking to assess the extent to which improved economic data will limit prospects for stimulus programs that continue at their current levels.  Relative safety in the markets is likely to weigh on the Dollar and Yen, but if we do start to see more upbeat commentary from central bank members, the greenback will regain the favorable light it had at the beginning of November.  Central bank views, more than specific data releases, will be the main forex drivers in the coming week.

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