The US dollar weakness may abate (Daily analysis 10.01.2022)

The dollar enters the new year on the back foot, declining against most currencies as job gains disappointed in December.

Nonetheless, the coming days show a considerable risk of emerging market currencies' momentum expiring and the dollar rising. This should have its origins in the renewed discussion of rapid interest rate hikes by the Federal Reserve. The US inflation data to be released on 12 January will prove very important. A new record of price pressures and the CPI reaching the 7% ceiling are in the air.

The dollar: deceptive weakness after the labour market report

The US economy added fewer than 200,000 non-farm jobs in December. This is a result close to the initial data for November and clearly weaker than expected. In response to the report, the dollar came under clear pressure at the end of the week. The EUR/USD exchange rate rose to around 1.1350.

This trend could prove unsustainable in our view. The weak employment change is mainly due to problems with the availability of workers, rather than the demand for labour. These are evident in the unemployment rate, which fell below 4.%, and they seem to be intensifying in the wage growth. This means that at first glance, a report that is unfavourable for the dollar may actually speak in favour of accelerating the prospect of an interest rate hike by the Fed. Last week, there was a lot of talk about the possibility of such a move as early as March. It is worth noting that this caused a much stronger reaction on bond and equity markets, especially in the technology sector. On the one hand, this observation is in line with the assessment that the dollar has exhausted its potential for strengthening and that its highs are behind it. On the other hand, it suggests that an unfavourable environment for emerging market currencies is once again crystallizing, in which the US currency will not lose value.