Will Yellen’s Hawkishness Drive the US Dollar Higher?

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Nov. 20 2020, Updated 4:37 p.m. ET

Minor bounce in the holiday-shortened week

The US Dollar Index (UUP) closed at 95.79 with a rise of 0.39% last week. This rise was a welcome relief for the dollar, which had been losing its value against its trading partners for the last few weeks.

The key driver of this bounce back in the US dollar was the surprise rise in the number non-farm payroll jobs that were added in June 2017. The US economy added an impressive 222,000 jobs in the month. The unemployment rate ticked up to 4.4%, compared to 4.3% in the previous month.

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Speculators continue to avoid the dollar

According to the Chicago Futures Trading Commission’s (or CFTC) latest Commitment of Traders (or COT) report on July 7, large speculators and traders have continued to reduce their bullish bets on the US dollar. 

According to Reuters, overall bullish US dollar (USDU) positions totaled $135 million, compared to $4.5 billion in the previous week. This amount is a combination of the US dollar’s contracts against the combined contracts of the euro (FXE), the British pound (FXB), the Japanese yen (FXJ), the Australian dollar (FXA), the Canadian dollar (FXC), and the Swiss franc.

The week ahead

The focus this week will be on the Federal Reserve speakers and Janet Yellen’s semiannual testimony to US Congress. It’s possible that Yellen will continue with her optimistic outlook on the US economy. She’s likely to highlight the improvements in the labor market, the improvements in the US economy, and the need to move toward a normalized monetary policy as early as possible.

The markets will likely be looking for any indication of the beginning of the Fed’s tightening its balance sheet. As of now, the exercise is expected to be announced in September 2017, and another rate hike is expected in December. If Yellen suggests an earlier start, we can expect the US dollar to rally against its trading partners.

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