Weak US payrolls finally break the currency stalemate

After a remarkably slow October in currency markets – for all the fireworks in bond and equity markets, most major currencies were roughly unchanged on the month – November has started with a bang. Between a relatively dovish FOMC and a spate of softer US economic data (in particular today’s non-farm payrolls report), the DXY index is on track for its worst week since mid-July as expected interest rate differentials have shifted back against the dollar. Given that the run-up in US interest rate expectations since the summer has been based in large part on the surprising resilience of the US economy (and weak data elsewhere), we think there is scope for some further unwind of dollar strength in the near term. That said, if the US economy slows as much as we expect it to over the coming months while Europe falls into recession, that is likely to result in at least some safe-haven effects that would provide support for the greenback. On balance, we continue to think the dollar will end the year a bit stronger.