Dollar Bull Move Remains Intact

The US dollar turned in a mixed performance in the week after the strong jobs data boosted expectations that the Fed’s liftoff would take place next month.  The Fed funds futures imply a 20.5 bp effective rate in December.At the end of October, it was 19.5 bp. In contrast, the 2-year note yield eased 3 bp over the past week to 85 bp, which is still 13 bp above where it closed last month. 

The lack of much follow through dollar buying is not unexpected, as the strong rally had left the greenback a bit stretched technically and the news stream failed to provide significant information.  The Fed’s leadership gave no reason to think that liquidity conditions in the middle of next month would stay their hand, barring no important economic or financial surprises. Although it is clear that not all ECB officials favor more asset purchases, Draghi continued to play up the downside risk that were materializing.  

The Dollar Index consolidated its recent gains by drifting a bit lower.It held the 38.2% retracement of the rally from the end of last month that is found near 98.40.The week’s high near 99.50, reached on November 10, represents a seven month high. The technical indicators we look at are supportive and a new marginal high next week would not surprise. However, it may still be early to anticipate a push through 100.00.  

The euro is bouncing along its trough.The attempt to squeeze it back above $1.08 was greeted with fresh sales.The technical tone is poor, and we look not only for a restest on the recent low near $1.0675, but more progress toward our near-term objective of $1.0525-$1.0550. The broadly sideways movement alleviated the short-term technical over-sold condition that caught our eye last week. 

After reaching JPY123.60 on Monday, the dollar pulled back toward JPY122.45 at the end of the week. The three-day 60 point slide in the S&P 500 may and the ten basis point pullback in the 10-year US Treasury yield provided the incentive. Nevertheless, the dollar held the 38.2% retracement objective of this month’s advance.