5 Reasons Why the US Dollar Will Continue to Fall
The US dollar has fallen to a record low against the Euro and there are at least 5 reasons why the weakness will continue. The first is the most immediate, which is tomorrow’s non-farm payrolls report. Although the market is looking for a rebound in job growth, we actually believe that there could be significant job losses.
As we mentioned in yesterday’s Daily Fundamentals, the last time service sector ISM contracted for 2 months in a row was back in late 2001. During that period there was actually 15 consecutive months of job losses with -300k being the biggest single month job loss and -147k the average. In comparison to these numbers, a back to back month of negative job growth seems like nothing. However if we do see two months of consecutive job losses, the dollar will continue to fall, taking the EURUSD up to another record high.
The second reason is interest rates. Two year bond yields are currently yielding slightly more than 1.50 percent while the Fed Funds rate is at 3 percent. That is a difference of 150bp which means that in order for the gap to be neutral, the Fed would need to immediately cut interest rates by 150bp. Since 1990, the average spread between the 2 year treasury rates and Fed funds is approximately +50bp and over the past 10 years, it is +25bp. Therefore it is not rocket science to see that a gap of -150bp is a huge discrepancy. Lower interest rates equal a lower US dollar. The third reason is technicals.
According to our Technical Analyst Jamie Saettele, a spike above 1.56 in the EUR/USD is very possible before dollar bulls see relief. Our latest FXCM Speculative Sentiment Index which is a contrarian indicator also calls for further gains in the Euro against the US dollar as speculative short positioning continues to grow.
The hawkishness of the European Central Bank is the fifth and final reason why the US dollar could extend its losses. Not only did they leave interest rates unchanged today, but they also let the market know how serious they are about maintaining price stability, which means that rates should remain
unchanged for the foreseeable future.
About the author
Written by Kathy Lien, Chief Strategist, DailyFX
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