U.S. dollar fell to record low. What caused its collapse? 

U.S. dollar fell to record low. What caused its collapse? 

The U.S. dollar plummeted down to its lowest level in almost a month versus its major rivals on Friday. Investors are now waiting for a crucial U.S. jobs report that could cause the Federal Reserve to consider an earlier tapering of stimulus.

On Friday, the dollar index changed slightly at 92.227 against the six other currencies, after earlier plunging to 92.151 for the first time since August 5.

On the other hand, the euro traded mostly flat at $1.1876. The common currency recently skyrocketed to its highest since August 4, exchanging hands at $1.1884. Regional inflation reached a decade-high level, while European Central Bank officials made hawkish comments ahead of a policy meeting on September 9. Both factors played a role in boosting the Euro higher.

The U.S. central bank has announced that a labor market recovery will be one of the conditions for paring asset purchases during the pandemic. The last report showed 5.7mn fewer people employed than in February 2020.

According to ING strategists, the bar looks quite high, though, and it won’t be surprising if the Federal Reserve will hurry into announcing tapering at an agency meeting scheduled on September 22. The analysts also added that unless the new data shows a 1mn+ NFP figure on Friday, DXY will likely continue to drift to the 91.80/92.00 area. Moreover, the common currency should continue rallying until the next Thursday’s ECB meeting at least.

Fed’s comments greatly influence the U.S. currency. What’s the forecast for a dollar? 

The U.S. dollar had been soaring for most of last month as traders thought that a taper could be imminent, even though coronavirus cases rose in the United States rapidly. The latter paradoxically gave the greenback an additional boost thanks to its role as a safe haven.

However, the dollar index tumbled down after surging forward to a 9-1/2-month high of 93.734 on August 20. Fed officials began dropping hints that the coronavirus’ spread could delay policy tightening, causing the dollar’s collapse.

At the Fed’s Jackson Hole symposium, Chair Jerome Powell announced that a taper was still possible this year. Still, he also added that there was no hurry to increase interest rates, pushing the greenback down further.

Investors expect monthly non-farm payrolls to show a rise of 750,000, with the unemployment rate dropping to 5.2% from 5.4%. Estimates range widely on the market, though, starting from 375,000 and surpassing a million.

Furthermore, signals from the economy have been mixed ahead of the report. Overnight, data showed layoffs tumbled down to their lowest in more than 24 years. On the other hand, the ADP National Employment Report was much weaker than analysts expected on Wednesday.

According to Commonwealth Bank of Australia’s forecast, the United States added 800,000 jobs in August. The bank noted that such a number would be enough to spur the agency to taper.

CBA strategists stated that the uncertainty associated with the Covid-19 is still standing in the way of an imminent taper announcement. That would reverse any greenback gains from a strong payrolls report.

What about the Australian and New Zealand dollars? 

USD Rebounded Thursday while GBP Fell Ahead of Reopening 

The Aussie dollar climbed up by 0.3% to $0.7426 after hitting a one-month high of $0.7430 earlier. The New Zealand dollar also soared by 0.18% to $0.7125 after jumping to the highest level since June 16 at $0.7130.

The U.S. dollar edged up by 0.1% to 110.03 Japanese yen. The USD/JPY pair has remained near the center of its trading range since early July. It showed little reaction to Prime Minister Yoshihide Suga’s decision to step down at the end of the month.

In Asia, Turkey’s lira plummeted down by 0.8% on Friday after inflation jumped more than expected. President Tayyip Erdogan wants a rate cut, but the central bank may not be ready for that yet.

According to new data, Turkish inflation skyrocketed to a two-year high of 19.25% year-on-year during the last month. That number exceeded a poll forecast of 18.7%. Consequently, the central bank had to raise its policy rate by 19%.

Furthermore, the lira dropped from near four-month highs. It exchanged hands at 8.33 to the dollar at last. Overall, the currency fell by almost 11% this year.

It is not all bad for the central bank, considering that core inflation declined slightly – noted Jakob Christensen, Danske Bank’s head of EM research. The central bank will probably keep the benchmark rate unchanged at its next meeting in September unless a lira weakens so much that the bank will be forced to hike rates.

How did other Asian currencies fare? 

Other emerging market currencies are waiting for American non-farm payroll data, avoiding big moves. South Africa’s rand and Brazil’s real are driving volatility. Analysts expect EM currencies to suffer sell-off in the next three months due to tapering fears.

South Africa’s rand gained 0.3%, while Russia’s Rouble added modest amounts due to the country’s service sector contracting in August.

The Chinese yuan declined after hitting a one-month high recently. A disappointing services activity survey pushed the currency lower. India’s rupee also dropped from three-month highs due to rising coronavirus cases.

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