The dollar is likely to rally in the week ahead after a surprisingly strong US employment report prompted investors to believe the Federal Reserve may raise interest rates sooner than anyone had anticipated. The dollar rallied after government data on Friday showed far fewer jobs were cut in November than expected, with some investors buying on expectations that rising rates will make US assets more attractive and stoke demand for dollars to buy them.
Other investors, who had bet against the dollar, bought the US currency to reduce the potential for losses after the dollar's rally picked up momentum. US employers cut 11,000 jobs in November, the smallest decline since the start of the recession in December 2007, the data showed, strongly suggesting the deterioration in the labour market was in its final stages. Friday's dollar rally was a change in the trading theme of recent months where good US economic news would spark a rise in risk tolerance and demand for higher risk assets and push investors away from the dollar.
"Sooner or later we have to leave the risk appetite scenario where good news for the US economy is bad for the dollar," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "We may have seen the first glimmering of that because of the jobs number, which was so much better than expectations, as were the revisions."
The dollar rose 3.6 percent against the yen this week, the best week since March 17 at current prices. The euro fell 0.9 percent against the dollar, the worst week since November 1 at current prices. Much of the dollar's gains for the week came in trading after the jobs report. "Looks like short covering right now," said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. "Depending on how short-term rates hold through the day, could see some US dollar support on a shift in Fed expectations."
LATE-WEEK SLEW OF DATA Investors face a slew of US economic data later in the week. US wholesale inventories for October will be released on Wednesday and are forecast to drop by 0.5 percent for the month after a 0.9 percent decline in the prior month. Thursday has the usual release of weekly jobless claims.
The international trade report, slated for issuance at the same time, is expected to show an October deficit of $36.8 billion compared with a deficit of $36.47 billion in September. Later on Thursday the November federal budget is scheduled to be released. October's deficit posted at $125.2 billion.
Friday is the heaviest data day of the week with November import and export prices, November retail sales and the preliminary reading of the December Reuters/University of Michigan Surveys of Consumers. Import prices are expected to rise 1 percent, up from 0.7 percent in October, while export prices are seen rising 0.4 percent, up from 0.3 percent in the prior month.
Retail sales are forecast to climb 0.6 percent in the headline number and by 0.4 percent excluding automobiles. That's after a 1.4 percent jump in the headline number in October and 0.2 percent excluding autos. The consumer sentiment index is seen rising to 68.5 in December from 67.4 in November.
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