EUR/USD: Dollar Is Strong And Steady

 | Oct 08, 2018 09:54AM ET

The report on the US labor market is further evidence of the U.S. strong economy.

Any drama has its final. Investors, willing to sell dollar amid a weak increase in nonfarm payrolls, have been discouraged. The U.S. employment situation is obviously positive. The unemployment rate has been down to 3.7%, the lowest level since 1969; nonfarm payrolls are increasing during 96 consecutive months (a new record); and even the effect of high core inflation doesn’t set back the average wages. According to New-York Fed president John Williams, the U.S. is enjoying a “Goldilocks” economy, where growth is strong and sustainable amid the absence of upward inflation pressures.

Although Reuters experts suggest bearish forecasts for the greenback, I must admit that it is rather strong currently. After the jobs data have been reported, the chances of three monetary restrictions in 2019 are up at 42%, from 29%; 10-Treasury yield breaks through 7-year highs; and the stock indexes are still being corrected amid the increase in borrowing costs. All this creates a pressure on emerging markets, strongly dependent on dollar. Since the global financial crisis, the share of dollar credits for non-banking institutions from GDP has increased to 14%, from 9.5%; the money must be paid back, which increases the demand for the U.S. dollar.

AT the same time, the growth-gap between the US economy and other countries is widening, first of all, because of strong risk of China’s GDP slowdown due to trade wars. After continues holidays, the Peoples Bank of China reduced the reserve requirement ratio by 1 bps; it is equal to 1.2 trillion yuans ($175 billion). Nevertheless, Shanghai Composite is trading down, and USD/CNY going up.

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