The issue with the dollar rally has always been its foundations. I highlighted this yesterday and this was also a feature in the Fed minutes released last night. The discussion over the economy reflected that participants “emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply”. But that has to be balanced by the fact that almost all also indicated that the “upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies”. This point is interesting, as the upward revision to the 2017 growth forecast in the December ‘dot-plot’ was 0.1%, so for now the FOMC is seeing higher growth as more of a risk than a reality.
From this, it’s not difficult to spin the view that the dollar correction seen overnight is overdone as a pure reaction to the minutes, but this reflects the fact that the dollar rally is more vulnerable to correction. It’s also reflected in the fact that the biggest gainer against the dollar in the past twelve hours has been the yen, which has lost the most ground in the rally of the past two months. This could well be the emerging theme of January as we head to the inauguration of the next US President. Tomorrow’s employment report could play into that theme, but we would have to see something fairly wide of the 180k median to really impact the dollar, because it’s not been the economic data that has been driving the latest rally. For today, we have the ADP numbers ahead of tomorrow’s US employment report, but these are unlikely to upset the tone unless substantially off the 175k expectation.