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U.S. Dollar Soars As Powell Expresses Little Concern About Inflation, Rates

By Kathy LienForexMar 04, 2021 04:49PM ET
www.investing.com/analysis/us-dollar-soars-as-powell-expresses-little-concern-about-inflation-rates-200565106
U.S. Dollar Soars As Powell Expresses Little Concern About Inflation, Rates
By Kathy Lien   |  Mar 04, 2021 04:49PM ET
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The U.S. dollar traded sharply higher against all of the major currencies after Federal Reserve Chairman Jerome Powell expressed little to no concern about the recent spike in yields. Ten-year Treasury yields climbed 4%, closing in on a one-year high. Stocks crashed in response, with the Dow Jones Industrial Average falling more than 300 points. The spike in yields is bad for stocks because higher borrowing costs slows the recovery. The benchmark 30-year mortgage rate, for example, rose above 3% for the first time since July 2020. Interest rates are still very low, but refinancing and demand for new homes will ease if mortgage rates continue to rise.
 
The U.S. dollar benefits in a few different ways. Powell’s confidence in the U.S. economy and its ability to weather the increase in rates is good for the U.S. dollar. A higher more attractive yield also draws demand for the greenback and most importantly, the slide in stocks drives investors into the currency’s safety. USD/JPY climbed to its strongest level in eight months after Powell’s comments, while USD/CHF rose to its highest level in four months. 
 
The big question now is whether Friday’s nonfarm payrolls report will add or ease the U.S. dollar’s gains. Based on today’s rally and the pre-Powell gain in stocks, investors are not concerned about a weak jobs report. Over the last two months, the job market was very weak – 227,000 jobs were lost in December and only 49,000 of those jobs were recovered in January. Economists are looking for a strong recovery in February, with U.S. companies adding more than 180,000 workers. There’s no question that the manufacturing job market is hot, but the service sector is slowing. Yesterday, we learned that the non-manufacturing ISM index dropped from 58.7 to 55.3 in February, with the employment component falling to 52.7 from 55.2. ADP also reported weaker payroll growth. There are reasons to believe that more jobs were created in February, but the deterioration in these two key measures suggests that payrolls could fall short of expectations. Weaker jobs data would compound the slide in stocks and sell-off in risk currencies. Ironically, this means it could be positive rather than negative for the U.S. dollar because ultimately, the U.S. economy is on a path to recovery.

Arguments in Favor of Weaker Payrolls

 
1.    Decline in Employment Component of ISM Services
2.    ADP Reports 117,000 Increase in Payrolls Versus 195,000
3.    Drop in University of Michigan Consumer Sentiment Index
 

Arguments in Favor of Stronger Payrolls

 
1.    4-Week Jobless Claims Fall For Four Straight Weeks
2.    Continuing Claims Drops to 4.295 Million from 4.69 Million
3.    Challenger Reports Drop In Layoffs
4.    Conference Board Consumer Confidence Index Hits 3-Month High
5.    Employment Component Of ISM Manufacturing Highest Since March 2019
 
It is important to understand that Powell’s relaxed outlook on inflation and yields comes from a place of optimism. Powell said:
“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects. That could create some upward pressure on prices. There’s good reason to think that the outlook is becoming more positive at the margins.”
 
Powell didn’t see a reason to take steps to stabilize the bond market and stem the rise in yields.
 
The Swiss Franc and Japanese Yen sold off the most against the U.S. dollar, but other currencies trailed not far behind. Significantly weaker than expected, Eurozone retail sales contributed to EUR/USD’s break below 1.20. However stronger-than-expected trade data from Australia did not help AUD avoid a slide. Aside from NFPs, Canada’s IVEY PMI and trade balance reports are also scheduled for release next week.
U.S. Dollar Soars As Powell Expresses Little Concern About Inflation, Rates
 

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U.S. Dollar Soars As Powell Expresses Little Concern About Inflation, Rates

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Comments (15)
TJ Theodore
TJ Theodore Mar 05, 2021 7:07AM ET
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Well done Kathy. Thx for sharing.
Rahman Dorai
Rahman Dorai Mar 05, 2021 5:55AM ET
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spikes in yields have bad effect on stocks because a higher borrowing costs?? i cant understand what does this meaning . higher borrowing costs will happening cause the FED will raise the interest rate of borrow the Dollar?  Thanks
John Smit
John Smit Mar 05, 2021 2:35AM ET
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All those USD shorts must be choking on their breakfast this morning. How quickly the narrative can change.
Tommy Rommazontz
Tommy Rommazontz Mar 04, 2021 11:18PM ET
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my turtle had a cabbage accident
David Bennett
David Bennett Mar 04, 2021 9:34PM ET
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that is hilarious. forget 1.9 trillion to give to other countries and funnel back, we should be borrowing 20 trillion...why not there will be no inflation.
Viking Fire
Viking Fire Mar 04, 2021 8:18PM ET
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Dollar is king. Deal with it world.
Junk Man
Junk_Man Mar 04, 2021 7:56PM ET
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You are a reporter, not an analyst... You just state the fact that are already published...
Raksaksa Tonne
Raksaksa Tonne Mar 04, 2021 7:27PM ET
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I heard some big time economist say that 20% of all the dollars in circulation was created last year. That means the dollar should crash by all least 20% just to maintain parity with its true worth, whatever that is.
Juan Gonzalez
Juan Gonzalez Mar 04, 2021 7:27PM ET
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since the dollars worth is speculative I don't think it's a 1:1 ratio
Scott Pittendrigh
Scott Pittendrigh Mar 04, 2021 7:17PM ET
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Great article ... I love the use of facts, arguments, and balance.  So much of what passes for financial journalism read like a tip from a bookie.  This is writing for mature and rational thinking adults.
Charlie Jiang
Charlie Jiang Mar 04, 2021 6:37PM ET
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Kathy, it would be nice to read your article before market closed. :)
Ursa Minor
Ursa Minor Mar 04, 2021 6:17PM ET
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funny how last month, fundamentals were not important, now all of a sudden we are back to fundamentals!? manipulation
AMG Ventures
AMG Ventures Mar 04, 2021 6:17PM ET
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that was future.. she's telling the history
spirit flow
spirit flow Mar 04, 2021 6:07PM ET
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hello friend
The Chad Bull
The Chad Bull Mar 04, 2021 5:46PM ET
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The dollar is dead
Elizabeth Alexander
Elizabeth Alexander Mar 04, 2021 5:38PM ET
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Excellent article — incredibly informative and well written.
Reza Tusi
Reza Tusi Mar 04, 2021 5:16PM ET
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I appriciate your easy language on explaining concepts..
 
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