Published: Wed, August 23, 2017
Markets | By Terence Owen

Dollar consolidation continues nudged by improving United States data

Dollar consolidation continues nudged by improving United States data

The dollar bounced on Tuesday after starting the week lower ahead of the Jackson Hole symposiums to take place later this week, which will feature the key G3 central banker trio of Yellen, Draghi, & Kuroda. The annual event is a traditional spot for central bankers to set the agenda for the final stretch of the year.

Central bankers gather Thursday through Saturday in Wyoming and the markets' focus will be on Yellen's speech Friday morning on financial stability, while Draghi will speak Friday afternoon. The price action was primarily driven by weaker U.S. Treasury yields and lower demand for higher-risk assets.

Minutes of the July Federal Open Market Committee meeting released last week revealed division on weak inflation among Fed members.

"Inflation has been the big question mark, both here and overseas", said Michelle Meyer, head of USA economics at Bank of America NY.

Under Draghi, the European Central Bank has pumped more than 2 trillion euros ($2.35 trillion) into the global financial system.

The pan-European Stoxx Europe 600 index was up half a percent at 374.64 in late opening deals, on course to snap a three-session losing streak. "This could be a platform for the USA dollar", Innes said, referring to the Jackson Hole conference. So they are much more susceptible to movements in US government bond yields than those on the euro zone benchmark, German Bunds.

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Instead, Draghi could repeat a message he gave in June at the ECB forum in Sintra, near Lisbon, when he expressed confidence in the eurozone economic recovery and reminded investors the ECB's exit from QE would be contingent on calm conditions on the financial markets, according to Mark Wall, chief economist at Deutsche Bank. It estimates $200-$300 billion flowed to emerging stocks and bonds annually during the peak years of the Fed's bond buying in 2012-2013.

This showed that emerging currencies tended to fall an average 0.6 percent in months when the dollar strengthened, whereas they rose by 0.4 percent against the basket during times of euro strength.

Any hawkish rhetoric from Draghi would trigger sustained upward pressure on the Euro while a more dovish slant and indications of concern over the Euro's level would be likely to push the single currency lower.

US inflation fell to 1.4% in June, based on the Fed's preferred gauge, and consumer prices in Europe are at 1.3%.

"The market is in a little bit of a wait-and-see mode as we go into Jackson Hole at the end of the week", said Lindsey Bell, investment strategist at CFRA Research in NY. "Moreover, the United States currency could benefit in the medium term from expectations the euro will move lower, as Draghi is unlikely to coffer any concrete guidance on when the European Central Bank will start tapering." added Konstantinos Anthis.

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