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Global currency rally faces US payrolls test

A weak dollar has spurred a rally in global currencies. However, its momentum is relative to the US jobs market.

A rally in global currencies driven by a weaker dollar will have to clear a hurdle from the US jobs data this week to extend its rebound.

New Zealand’s dollar, South Korea’s won and South Africa’s rand led gains in major currencies on Tuesday amid broad weakness in the greenback. The dollar has fallen 0.6 percent against the euro since Federal Reserve Chair Jerome Powell said on Friday that the central bank could start scaling back asset purchases this year while holding borrowing costs. He sounded a note of caution, however, about employment levels.

“Markets continue to liquidate long-dollar positions following Powell’s Jackson Hole speech last week,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “Friday’s nonfarm payrolls will be a key data print for markets,” and a much better-than-expected number could halt the dollar’s decline, he said.

A strong US employment report could increase the chance that the Fed will kick off tapering as soon as next month, according to NatWest Markets Plc. That would bode ill for higher-yielding emerging-market assets. Growth in US payrolls probably slowed in August after increasing by the most in almost a year the previous month, according to the median estimate in a Bloomberg survey of economists.

The Bloomberg Euro Index is heading for its eighth straight day of gains, the longest streak since March 2020, when the coronavirus crisis turned global. South Africa’s rand has led emerging-market currency advances in the past week, turning around a monthly performance that was the worst within the group.

A technical chart signals a further drop in the US currency. The Bloomberg Dollar Spot Index has slid below an upward trend-line support that connects lows in June and August amid bearish momentum, as shown by technical indicators such as MACD and stochastics oscillator.

“Markets are no longer worried about Fed taper and rate hikes,” said Qi Gao, a currency strategist at Scotiabank in Singapore. Bloomberg News

Image courtesy of Bloomberg
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