The US dollar’s first weekly loss in more than a month is probably a temporary setback, according to currency strategists, as political and inflation risks come back into focus.
The Bloomberg Dollar Spot Index extended a decline on Friday, pulling further away from last week’s year-to-date high, amid weakness in US economic data. The drop comes as political developments in the UK and France support gains for the pound and the euro against the greenback.
Even the Japanese yen was slightly stronger against the dollar in Friday trading, though the currency remains at depressed levels that market participants are watching in case authorities decide to intervene and prop up the currency.
Bloomberg’s dollar gauge declined as much as 0.3% on Friday before paring most of its losses. The low was reached after June employment data showed slower hiring and wage growth that reinforced expectations for Federal Reserve interest-rate cuts beginning this year.
The data “opens dovish risk to Powell’s congressional testimony on Tuesday and Wednesday,” said Daniel Tobon, a New York-based FX strategist at Citigroup Inc., referring to Fed Chair Jerome Powell, who is slated to discuss the economy and monetary policy. Earlier this week, the greenback was hit by a bigger-than-expected drop in the ISM Services Index to a four-year low.
To Tobon and others, though, it’s going to take more than that to derail expectations for the dollar’s strength for the rest of the year. While there’s scope for the dollar to weaken next week, US political risk and the inflation trend should resume underpinning the US currency, say currency strategists at Citigroup, Credit Agricole and Brown Brothers Harriman.
US election risks that are ultimately dollar-positive “could come further into the forefront” in the next few weeks, said Tobon, who expects “further tactical dollar weakness into next week.”
The US presidential contest to be decided in November was upended by last week’s debate, which unleashed calls for President Joe Biden to drop out. Improved odds of a second term for former President Donald Trump have stoked interest in trades that benefit from an inflationary mix of looser fiscal policy and greater protectionism, including a strong dollar and higher US bond yields.
“It would take evidence the inflation outlook is becoming more benign to see the dollar underperforming further,” said Valentin Marinov, Credit Agricole’s head of G-10 FX research & strategy.
The pound was the biggest gainer against the dollar this week as traders bid up British assets in the wake of Labour Party’s sweeping victory, anticipating a period of political stability and fiscal discipline.
The euro gained as French polls showed Marine Le Pen’s National Rally is set to fall well short of an absolute majority in Sunday’s legislative election.
The dollar has strengthened against the euro this year as the European Central Bank moved toward cutting interest rates for the first time in years last month. By contrast, the Fed had adopted an increasingly cautious stance amid halting progress toward slower inflation.
“The US economy, whilst slowing, is still doing rather well and so the Fed will remain cautious,” said Win Thin, global head of markets strategy at Brown Brothers Harriman in New York.
With assistance from Anya Andrianova and Carter Johnson.
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