Dollar Retreats Ahead of Key Economic Updates, Metals Gain

Yen leads rebound versus the greenback along with euro

The U.S. dollar fell the most since September 2016 versus a basket of major currencies as a pullback in U.S. bond yields prompted some investors to take profits after the currency’s best run in almost two years, as reported by Bloomberg on November 27th, 2016. Investors are also bracing themselves for updates on key performance data to be released over the next few days that could derail the greenback’s rally. Expectations of rises in U.S. inflation and interest rates have driven the greenback to a gain of more than 6% in October and November 2016, its strongest performance over a similar period since its rally in early 2015.

Meanwhile, the yen led the rebound versus the greenback along with the euro and emerging-market currencies. The yen gained 1.1% to 111.96 per dollar from an almost eight-month low on Friday, November 25th, 2016, while the euro added 0.6% to $1.0652 in a third day of gains.

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The key issue for the U.S. dollar in the coming few weeks will be the Fed’s possible increase of existing interest rates. The U.S. currency’s appreciation in November 2016 came as Treasury yields surged on bets the Donald Trump administration will increase spending and spark an increase in inflation. The combined prospect of a boost in fiscal stimulus and higher interest rates has led to dollar to erase early-year losses so far during the month.

Market braces for key data releases

The Bloomberg Dollar Spot Index also retreated from a decade high before updates on U.S. gross domestic product, personal spending, and nonfarm payrolls this week. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, declined 0.6%, heading for the biggest drop since September 21st, 2016. President-elect Donald Trump’s promise to boost infrastructure spending has propelled bets on a December interest-rate hike to 100%.

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Source: Bloomberg

According to median estimates ahead of the jobs data to be released on December 2nd, 2016, the U.S. economy added 175,000 jobs in November 2016, up from a gain of 161,000 in October 2016. Job gains averaged 189,000 per month from January 2016 to October 2016, well above estimates of the pace necessary to absorb new entrants to the labor force.

With the market seeing action at the Fed’s December 13th-14th, 2016 meeting as a certainty, pricing in federal funds futures contracts imply a greater than 95% chance of a quarter-point hike. The focus has now shifted to 2017, where futures show a more than 65% chance of further rate hikes by June 2017.

Commodities gain

In commodities, zinc and lead surged while gold climbed along with Treasuries. Zinc rose 3.7%, headed for its highest close in nine years at the London Metal Exchange, as bullish speculative sentiment in China spurred a fresh surge for industrial metals. Lead rallied and is set for its strongest settlement since 2011. Gold for immediate delivery gained 0.7% to $1,191.62 an ounce following last week’s 2% decline, its third straight weekly retreat.

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Among Treasuries, the 10-year note yield was little changed this week at 2.36%, after reaching the highest level since July 2015, according to Bloomberg. The 2% security due in November 2026 traded at 96 26/32. The yield on the two-year note reached 1.17%, the highest since 2010.

Source: Bloomberg
Source: Bloomberg

The U.S. economy has made significant progress in 2016, inching closer towards the Federal Reserve’s dual-mandate objectives of maximum employment and price stability. It remains to be seen whether the key economic data updates are encouraging enough to prompt the Fed to take accommodative action to stabilize the economy in the coming months.

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