US dollar builds on its losses to fall 5% in November

Equity markets seem to be pricing in a smaller 50 basis point rate hike at the US Fed's final meeting in December

A currency exchange shop in Cairo. The US dollar has come under increasing pressure after some US Federal Reserve members indicated that it would soon be appropriate to temper future interest rate incShow more

It may have been a shorter trading week last week, but this didn't stop the US dollar building on its losses for the month of November, while US equity indices closed higher.

The US Dollar Index, a measure of the value of the greenback against a basket of weighted currencies, is down more than 5 per cent this month.

While illiquid markets, due to the Thanksgiving holiday, may have contributed to the selling pressure, it was the Federal Open Market Committee meeting minutes released on the Wednesday before the holiday that continued to pile the misery on dollar bulls.

The FOMC meeting minutes are an in-depth record released after each US Federal Reserve meeting and provide a deeper insight into the committee’s decision-making.

Watch: US Federal Reserve chief warns of 'pain' in reducing inflation

The most recent minutes from the November 1 to November 2 meeting showed that a “substantial majority” of Fed members thought it would “likely soon be appropriate” to temper future interest rate increases.

The minutes clearly painted a more dovish picture than the Fed meeting and, quite frankly, contradicted chairman Jerome Powell’s comments that it would be premature to consider pausing interest rate increases to curb inflation.

As a result of the minutes, dollar weakness ensued and markets now seem to be pricing in a smaller 50 basis point hike at the Fed's final meeting in December.

Looking forward, market movements — particularly the dollar and asset classes linked to it — will continue to remain data sensitive.

This is thanks to the mixed messages from the Fed, while comments from its members will be key this week.

Mr Powell is due to speak on Wednesday night about the US economic and labour market outlooks, and this speech will be very keenly scrutinised.

If Mr Powell comes out dovish, expect the dollar's prospects to continue trending lower.

However, if he maintains his hawkish bias, we may be in for a dollar bounce in the lead up to the final meeting of 2022 on December 13 and 14.

Along with Fed speakers interspersed throughout the week, keep an eye on the US data docket.

The trend of good data leading to a sell-off in US markets and vice versa is set to continue.

Some of the key data points expected to dictate year-end dollar movements include the US gross domestic product, which is due out on Wednesday (5.30pm UAE time).

Next up will be the Fed’s preferred gauge of inflation — the PCE Price Index, which will be released on Thursday and is expected to dip 0.3 month on month compared with October's 0.5 per cent.

Year on year, the core PCE is expected to come in at 5 per cent compared with 5.1 per cent previously.

Any beat on these readings should be favourable for the greenback and negative for other currencies, gold and US equities.

The data calendar will peak with November’s US non-farm payrolls report, due out on Friday at 5.30pm UAE time. This will be a lively release and could be the most impactful.

The US labour market has bounced back strongly following Covid and employment is near full, with an estimated two openings per jobseeker, and wages at their highest level.

The current situation has created a tricky dilemma for the Fed — with a strong labour market, the logic tends to be that people have enough job security and will lead to an increase in demand for goods and services, which ultimately applies more price pressure (inflation).

Based on what the Fed has told us so far, this means that a continued strengthening of the labour market will force its hand to keep the rate hike cycle going.

Therefore, if there is strong growth in the employment report for November — 200,000 new jobs are expected compared with 261,000 last month — we will see dollar buying coming in on Friday and vice versa.

However, this report and the PCE data will put to rest the debate on whether we will see a 50 basis point hike or a more hawkish 75 basis point hike at the December meeting.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers