Global Themes

The U.S. dollar held on higher ground Friday and was poised for its best week since 2016. For all its struggles of late, the U.S. dollar hasn’t lost its safe harbor status which has been a boon with Wall Street tumbling into correction territory, down 10% from its peak. A short-lived U.S. government shutdown overnight had little impact on the greenback. The disorderly backdrop for world markets continues to support haven assets, including the yen which flirted with four-month highs against the dollar. The greenback enjoyed broad-based gains, holding near multiweek peaks against the euro, sterling and Canadian dollar, and posted solid gains against emerging market units like Mexican peso and South African rand. Global markets continue to fret over higher inflation and rising government bond yields. As long as the market mayhem persists, safer bets like the dollar should remain in vogue.


Canada’s dollar clocked new 6-week lows after the nation’s jobs report disappointed and sprinkled cold water over prospects of another interest rate hike anytime soon. Canada started the year by unexpectedly shedding 88,000 jobs in January, compared to forecasts of an increase of 10,000. Unemployment jumped two ticks to 5.9% from 5.7% which was the lowest in 4 decades. A closer look at the data offered a silver lining, however, which should help limit loonie weakness. All the job losses came from the less meaningful part-time positions, while wage inflation rose at a 3.3% annual rate from 2.9%.


The euro’s 7-week winning streak appears over with the single currency down two cents on the week which was poised for its worst since at least October. Profitable bets have been unwound as global markets tank. The euro has been among the most profitable bets over the past year given its double-digit gains. The global market meltdown has clouded the euro’s short-term outlook. But the big picture for the euro remains bright, suggesting bouts of weakness could give way to renewed buying.


Sterling squandered a Bank of England-inspired rally as it slipped to fresh 3-week lows. The pound had bounce higher on Thursday after the BOE signaled that interest rates could soon rise from 0.5%. The BOE’s hawkish bias though was based loosely on a smooth Brexit process which could prove overly optimistic. Adding to the pound’s about-face, U.K. data on factory growth and trade disappointed which raised the risk of Q4 growth getting marked down. Lastly, the EU’s chief Brexit negotiator warned Britain that a transition deal was “not a given.”


The U.S. dollar index was on track for a weekly gain of about 1.4% which would mark its best since November 2016. The dollar stabilized from 3-year lows this week as global markets crashed and sent risk-wary investors in search of safer ground. For all its struggles, the dollar remains a go-to bet when market instability flares. But sustaining gains could prove problematic for the dollar given that the outlook for the U.S. and global economies remains rosy. Economic optimism abroad has checked the dollar’s appeal and shifted investment overseas. U.S. inflation looms next week. If warmer, consumer prices on Feb. 14 could trigger renewed stock market volatility.

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