The biggest problem for the U.S. dollar is that on its most fundamental level, the greenback is a safe-haven currency. The U.S. led the recovery since the beginning of the year, so investors had plenty of time to buy dollars and take profits. Now, vaccination rates are rising in Europe and they are looking to ease restrictions. The first quarter was the U.S. recovery trade, but the second to third quarters should be focused on the global recovery. Strong global growth is generally more positive for high-beta currencies than safe-haven currencies like the U.S. dollar. When Eurozone nations finally rollback restrictions and show stronger data, there will be renewed interest and demand for the euro. The recent weakness in the dollar is a reflection of investors getting ahead of this trading opportunity.
Aside from the U.S. jobs report, the Reserve Bank of Australia and Bank of England monetary policy announcements are also in focus this week. The RBA meets tonight and it is widely expected to keep monetary policy unchanged. The RBA should share the RBNZ’s concerns about house prices but, with overall inflationary pressures subdued, it is in no rush to act. Even with the extraordinary amount of stimulus the RBA is providing, core price growth hit its lowest level ever in the first quarter. A lot of this is driven by slow wage growth, which is a challenge to recover, so it may be some time before price pressures see meaningful acceleration.
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