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Almighty Dollar Reigns Supreme

The greenback is reading its own obituary once again, defying early January’s almost-universally bearish sentiment to surge toward a six-week trade-weighted high.

Data released yesterday showed initial jobless claims fell by 1,000 to a seasonally-adjusted 194,000 last week, pushing the four-week average to 189,500. Despite widespread fears of a slowdown, employers continue to add jobs at a pace consistent with strong economic growth, and laid-off workers are finding new roles quickly.

This comes on top of a slew of data releases that point to robust growth and strong underlying inflation pressures in the US economy. Employers added more than half a million jobs in January, retail sales rose 3 percent, manufacturing output climbed 1 percent, and core price indices remained elevated.

Rate expectations keep rising, and Federal Reserve officials are throwing gasoline on the fire. In comments yesterday, St. Louis’ James Bullard said he would support lifting the official benchmark into a range between 5.25 and 5.5 percent, indicating that a half-percentage-point hike is possible at the March meeting. Earlier in the day, Loretta Mester said she also saw a “compelling economic case” for a jumbo-sized increase. The two currently do not vote on the rate-setting committee, but Mester could be in line to vote if Chicago’s Austan Goolsbee replaces Lael Brainard as Vice Chair in the months ahead.

Two-year Treasury yields are floating near a three-month high at 4.67 percent, while the ten-year is holding at 3.87 percent. Rates have climbed by more than 10 percent across the curve since the beginning of the month, tilting yield differentials firmly in the dollar’s favour.

Canada’s dollar continues to take it on the chin, with rising US rates limiting the currency’s appeal even as they threaten the viability of the country’s debt-fuelled economy. With long-term lending rates (largely set in US markets, not by the Bank of Canada) poised to climb once more, investors are bracing for another leg down in housing market activity and overall consumer consumption.

The Japanese yen continues to weaken in the run-up to next week’s confirmation hearings for the next Bank of Japan Governor, Kazuo Ueda. Veteran traders think this is largely down to flows around fiscal year end (and the exogenous rally in US yields), but we would hesitate before jumping on the momentum train – Haruhiko Kuroda’s last meeting is quickly approaching, and we think the notoriously-mischievous central banker could play one last trick on markets on his way out of office.

In an interview with Bloomberg, Isabel Schnabel joined the European Central Bank’s chorus of hawks, saying “Markets are priced for perfection. They assume inflation is going to come down very quickly toward 2 percent. That would be a very good outcome, but there is a risk that inflation proves to be more persistent than is currently priced”. European yields climbed and the euro jumped against the dollar – but soon reversed lower, pushing toward resistance around the 1.06 handle.

Today’s data calendar is extremely light: US import prices are seen falling 0.1 percent from the prior month in January, the Conference Board’s Leading Economic Index could slump 0.3 percent, and Baker Hughes will release its latest rig count numbers. The Fed’s Thomas Barkin and Michelle Bowman are scheduled to speak.

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