The dollar has gathered some decent momentum into today’s US payrolls risk event. The remarkable rebound in US equities since the post-‘Liberation Day’ turmoil alongside Treasury yields settling lower have signalled that the “sell America” fears have been largely quelled. The dollar recovery mirrors this: the FX confidence crisis is over – it’s now a matter of whether there is enough in the data and in US policies to justify a sustained rotation away from the dollar as a reserve asset beyond the short term. This will become clearer in the coming months; for now, the reality is one of a more resilient, less volatile dollar. And considering there is still around a 2.5% risk premium on the dollar (vs EUR), there is more room to recover.
The question today is whether US jobs data can trigger a reversal in the dollar momentum. We think not, even though we are below consensus with our payrolls estimate (ING: 110k, consensus: 137k, whisper number: 120k). The real risks for the dollar may only lie below a 100k print. Anything between that and the 137k consensus may not leave a clear mark on FX. That’s because an activity and jobs market decline is already embedded in the value of the USD, so a relapse of intense dollar shorting probably requires evidence of an abrupt rise in joblessness, not simply a gradual employment slowdown. Our call is for the unemployment rate to stay at 4.2%, in line with consensus. This should allow the Federal Reserve to retain a neutral position quite comfortably (despite Trump’s complaints) when it meets next week.
DXY is back above 100.0, and in our view, may have a bit further to go as the highly efficient, forward-looking FX market pulls a bit more risk premium from the dollar. A rise to 101.0 would mean the dollar has recouped exactly half of its post-‘Liberation Day’ losses. In current market conditions, and having shifted from tariff threats to trade deal discussions (even with China, which is currently pondering its openness to talk with the US), such a move in the dollar looks warranted, even if a softish payroll read today may put the dollar recovery on pause.
