US DOLLAR FUNDAMENTAL FORECAST: BULLISH
The US Dollar snatched victory from the jaws of defeat last week. What looked likely to be another heavy loss until the last 48 hours of trade transformed into a narrow increase as haven demand reemerged. Trade war tensions between the US and China escalated as Donald Trump threatened to increase tariffs by another $200 billion and funding stress in Argentina revived worries about a Fed-driven rise in global borrowing costs, roiling emerging market assets.
The week ahead brings top-tier economic data back into the equation. The service-sector ISM survey is expected to show activity growth in the overwhelmingly dominant part of the economy accelerated in August after a slowdown in the prior month. Meanwhile, the always closely watched labor market data set is projected to reveal a pickup in hiring over the same period. The jobless rate is seen slipping to an 18-year low of 3.8 percent as wage inflation holds at a respectable rate of 2.7 percent on year.
On balance, all this bodes well for the greenback. If the White House pushes through another round of tariffs and churn in the emerging markets space continues, safety-seeking capital flows are likely to keep it well supported. If sentiment brightens however, a backdrop of upbeat domestic data that reinforces Fed rate hike prospects might make the benchmark currency attractive on policy divergence grounds, pushing it upward amid renewed reach for yield.
