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  • The US dollar has been down to test a fresh two-year low at the start the week.
  • The Federal Reserve’s Chair Powell cementing the negative real yield narrative for the dollar has seen a continuation of the great unwind.

Against a basket of currencies, measured by the DXY index, the US dollar is currently down 0.22% within the day’s range of 92.48 and the 91.99 low.

The currency was last this low in April 2018, now down 1.24% for the month which has equated to the worst August in five years and well as the longest run of monthly losses since the summer of 2017.

There are now question marks over the US dollar’s purchasing powers.

There is also an underbelly of doubts as to its reserve currency or safe-haven status which have come to the surface since last week’s comments from Powell.

At the Jackson Hole, Powell made an announcement that effectively cemented the negative USD real yield narrative at a time where the Fed’s stimulus has driven risks assets higher.

The adoption of average inflation targeting and tolerance for inflation overshot suggests a number of bearish factors for the markets to consider when seeking a fair value in the greenback.

The markets are of the mind that it is now clear that interest rate increases are a very distant proposition and right away, markets will not be expecting a higher yield from the dollar for which it had enjoyed for so long.

Secondly, real USD rates will likely remain low if the Fed succeeds in generating higher domestic price pressures, something which has been supporting the price of gold which is negatively correlated to the US dollar. 

In a world that the coronavirus can be contained and eradicated by the success of a vaccine and herd immunity, economic growth prospects will undermine the allure of the US dollar.

This is especially true if the US economic recovery lags behind the likes of larger emerging markets such as China.

At the start of the week, the Chinese data arrived with a strong composite PMI number which raises prospects of a faster global recovery.

Key week for US economic data

Meanwhile, it is going to be a big week for US data.

The focus will be on the US labour market report, Friday, and numbers that fall in below the market’s expectations could be USD negative as it would cement the lower-for-longer Fed interest rate outlook.

Before then, we will have the  August US ISM Manufacturing on Tuesday. Expectations are that they should increase modestly while ISM Non-Manufacturing on Thursday should modestly decline.

DXY levels

 

 

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