US Dollar Losing Haven And Yield High Ground, NFPs And Risk Critical

Fundamental Forecast for Dollar: Bearish

• Rate expectations have dropped post FOMC and US GDP with September seen as an 18% chance and December 36%
• With its economic footing slipping and risk trends steady, the Dollar loses a critical position as a haven
• See our 3Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page

The USDollar dropped every day this past week resulting in a 1.4 percent slide and the longest series of daily losses in 15 months. That said, despite the steady tumble – punctuated by Friday’s sharp drop – the Greenback’s fundamentals still confer it a considerable air of authority. That bearing is not permanent however. Should the appeal of US assets from both growth forecasts and Fed rate speculation continue to fade, the greatest concentration of premium the currency has built up over the past five years could be put at risk. If, at the same time, the apparent stability of the Dollar falter or the market cast off its appetite for safety; the Dollar’s deepest well of untapped strength will dry up. That puts a considerable emphasis this week on global sentiment bearings and NFPs.

Looking back at the USD reaction to this past week’s fundamental sparks, we can gauge where the market’s focus is trained. When the BEA reported the world’s largest economy grew only 1.2 percent in the second quarter (less than half the consensus forecast), it dealt a serious blow to the currency’s and country’s inherent allure. On the surface level, the weak economic figure undermined rate expectations. After the economic update, market-based rate forecasts for a hike in September dropped to 18 percent (from 28 percent the day before) and the probability of a move in December to 36 percent (from 45 percent). While a 25 basis point increase in benchmark yield represents relatively little motivation; in a world of negative rates, it carries significant appeal.