Dollar overcomes payroll weakness to return from low

Goldman Sachs says the dollar slump is over.

The greenback has rallied almost 1% from the one-year low of last week, extending gains even after April payrolls data showed the weakest job growth in seven months.

Goldman Sachs says the post-payrolls rally shows that market expectations for growth and Federal Reserve interest-rate increases have fallen too far, too fast, positioning the currency for a rebound. 

Strategists at Societe Generale SA and Brown Brothers Harriman & Co. are less bullish, saying a broader dollar recovery will depend on further economic data.

“We remain dollar bullish and think the trajectory is higher from here,” said Robin Brooks, Goldman Sachs’s New York-based chief currency strategist. 

“The reaction on Friday to a meaningfully weaker-than-expected payrolls was telling: We had a disappointing jobs number and the dollar actually bounced.”

Brooks estimates that the dollar will gain 15% in the next two years as US monetary policy normalises. 

This is not the first time Goldman Sachs has reiterated its dollar-bullish stance in recent months, a view that has not always panned out. 

The bank closed a dollar position against a equally weighted basket of euro and yen in February, one of its top trade recommendations for 2016, with a potential loss of about 5%.

The dollar saw its biggest advance in six months last week, paring its 2016 decline to 4.1%. 

The dollar fell for a third straight month in April, the longest stretch since before it embarked on a 20% rally in July 2014, on speculation the Fed will take a slower path to raising rates as it factors in headwinds from slowing global economic growth.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, was little changed as of 11.52am in New York, after climbing 1.5% last week, the most since November 6. The U.S. currency rose 0.8% to 109.17 yen, touching the highest since April 27.

While Fed policy makers have talked up the potential for rate hikes in the near term, reiterating that June’s FOMC meeting will be “live” and forecasting two potential rate increases this year, markets are not convinced.

Traders have already discounted the likelihood of any Fed action before the fall, predicting just a 4% change of a rate hike next month.

“The key issue facing the foreign exchange market is whether the modicum of strength the US dollar demonstrated lat week is the beginning of a sustainable move,” said Marc Chandler of Brown Brothers Harriman.



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