Fundamental Outlook for US Dollar: Bullish

- Dollar surges to four-year highs against the Euro on risk breakdown
- US Nonfarm Payrolls surge, but report actually disappoints
- View our monthly Euro/US Dollar Exchange Rate Forecast

The US Dollar finished the week higher against all G10 and other major currencies, fueled by a substantial decline in the S&P 500 and broad deterioration in financial market risk appetite. A flight to safety following a relatively disappointing US Nonfarm Payrolls report was the clear highlight of the week’s trade for the safe-haven Greenback; the poor labor market result counter-intuitively forced sizeable dollar gains.

Once-a-decade hiring for the 2010 US Census accounted for a whopping 90 percent of all net job gains through the month of May, and the private labor market added a mere 41,000 jobs through the period. Markets had ostensibly hoped for stronger signs that the US economy was on the mend and quickly sold risky assets in response to the disappointment. Whether or not the US Dollar can continue to gain will almost certainly depend on the next moves in the fast-falling S&P 500. Recent financial market turmoil leave USD momentum to the topside, but it will be critical to watch financial markets in the days ahead.

With the S&P 500 trading near significant support near the 1050 mark, the next week of trading could very well set the tone for the next months of trading. Our Senior Currency Strategist argues that recent price action has seen remarkably similar patterns to that which preceded 1929 and 1987 stock market crashes. It is obviously quite the leap to predict that the stock market could see such a sharp drop through such a short period of time, but the similarities are difficult to ignore. Markets remain on edge and intraday price swings have been exacerbated by low trading volumes. If we see a panic in earnest, one cannot rule out an intraday move similar to the “flash crash” seen just one month ago. It will be very important to watch how key risk barometers behave around key technical and psychologically significant price support levels.

Traders should be on the lookout for sharp price moves following this coming Friday’s Advance Retail Sales data. Given market focus on the relative health of the US consumer, any especially large surprises could force significant short-term moves. The same can be said for the subsequent University of Michigan Consumer Confidence report, but it serves to note that markets’ reaction to the U Michigan data has been muted as of late.

The key questions rolling forward are whether we’ve truly seen the worst of recent market turmoil and whether the US economy has turned the corner towards growth. With that in mind, we will continue to follow any and all developments in economic data and—more importantly -- financial markets’ attitude towards fundamental developments.

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