What Does The Break Out Of The U.S Dollar Mean?

Following Friday’s ‘blockbuster’ jobs report, November 6th, 2015, the markets are finally coming around to taking the FED seriously once again. The Dollar Index had enjoyed a steady and a strong rally for the past 18 months since July of 2014 as the Federal Reserve started to communicate to the markets its intention to wind down the massive Quantitative Easing (or QE3) involving purchasing Mortgage Backed Securities and US treasuries to the tune of $85 billion.

The FED’s intention to take away the ‘Punch bowl’ in the aftermath of the 2008 Global Financial Crisis was met with a lot of doubt, with most of the markets expecting the FED to only come back with more QE. However, as the FED started to slowly wind down its purchases by $10 billion since December 2013, the US Dollar started to rise steadily.

By early 2015, the FED signaled that the era of accommodative monetary policy, which saw interest rates at historical lows was coming to an end. For most of 2015, the main driving theme was that the FED was going to hike rates this year. The initial deadline was set for mid-2015 or around June/July this year. However, the plans were thwarted as inflation remained consistently low below the FED’s target rate of 2.0% while the unemployment rate was slowly but steadily declining towards the FED’s 5.0% full employment mandate.

Friday’s October jobs report, November 6th, 2015 finally saw the FED reaching one of its two goals, full employment, as the US unemployment rate fell to 5.0%. It was a ‘blockbuster’ jobs report for the mere fact that after a string of two weak months, the average jobs increased by 271k, beating the median estimates and also the average hourly earnings saw a strong increase, rising to an annualized 2.5%.

It was only a few days ago last week that Dr. Janet Yellen testified to the US Senate banking committee that the FED intends to decide on whether to hike rates at the December 2015 meeting, if the data supported the view, and indeed there was a strong validation from the jobs market last week. It’s a real “live possibility.”