U.S. Dollar weakens as shifting economic landscape sends mixed signals

Key Takeaways:

  • The U.S. dollar's rally has stalled after mixed economic data signaled a weakening dollar.
  • Some economic indicators hint at strengthening dollar, while other seem to indicate the currency might be growing weak.
The dollar's rally stalled after mixed signals from the financial markets.
The dollar’s rally stalled after mixed signals from the financial markets. Image from Unsplash

NEW DELHI (CoinChapter.com) — The U.S. dollar’s rally is weakening, with the WSJ Dollar Index (a measure of the dollar’s value relative to a basket of foreign currencies) falling nearly 3% from its May 12 high of 96.95 as it reached 94.09 on May 30.

The WSJ dollar index fell after reaching a multi-decade high in May
The WSJ dollar index fell after reaching a multi-decade high in May. Source: WSJ Markets

However, the currency strengthened over the last week as the index rose to 95.13 on Jun 6, exhausting a two-week downtrend. The dollar index’s recent rally led the currency to levels last seen in 2002.

Economic Landscape Might Suggest A Strong Dollar

As per the U.S. Bureau of Labor Statistics data, employers added 390,000 jobs in May, significantly above the 328,000 Dow Jones estimate. However, the number is down from Apr’s 436,000 and below the monthly average pace of growth in 2021.

Although the market seemed to be cooling down, investors would likely see May’s better than expected performance as a sign of a competitive job market.

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Furthermore, market data suggests that American customers continue to spend money rapidly. Despite the data adding to the trends that propped the dollar’s rally over the past 12 months, some investors are worried the Federal Reserve might have to lower the rate of interest rate hikes.

In detail, investors prefer currencies from countries whose central banks have been raising interest rates recently. Dollar investors are relying on hopes that the Fed will raise interest rates by a percentage point during the Fed meeting in Jul.

Moreover, a strong dollar would make products made in the U.S. more expensive for foreign cutomers.=. As a result, U.S. multinationals, such as Microsoft, have had to report facing losses in recent reports.

Investors Looking For Signs of Slowing Dollar

Investors would likely analyze the consumer data and inflation numbers due on Friday to look for clues regarding the state of the dollar. Lower inflation data, for example, could see the Fed switching to a more restrained approach toward rate hikes.

As a result, the dollar might fall further if the Fed eases rate hikes in response to slowing inflation. The unemployment rate remained at 3.6%, more than the expected rate of 3.5%. In addition, average hourly earnings increased by 0.3% compared to the 0.4% forecast.

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Moreover, the volatile foreign exchange market has investors looking to the Fed’s Sept meeting. Officials of the central bank remain nearly unanimous on the need for half-point increases during the Jun and Jul meetings.

The market went through six weeks of thinking the sky’s the limit for the Fed. [Now,] I think the dollar has topped out.”

Steve Englander, head of North American macro strategy at Standard Chartered, told the WSJ

Traders believe the impact of tighter lending on the housing market might be another indicator to watch.

The sale of residential properties fell sharply in Apr 2022
The sale of residential properties fell sharply in Apr 2022. Source: U.S. Census Bureau

The sale of new homes fell sharply in Apr, indicating higher interest rates hurt buyer demand. Additionally, with rising mortgage interest rates, home ownership has become expensive.

Constrained consumer spending and stock market volatility are other factors that investors believe might slow down the dollar.

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