Dollar Gains as Early Tapering Expectations Grow

By Peter Nurse

Investing.com -- The dollar pushed higher in early European trading Tuesday, as a series of strong jobs releases raised expectations of an early tapering of the U.S. Federal Reserve’s massive monetary stimulus. 

At 1:55 AM ET (0555 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded around 0.1% higher at 92.972, after earlier trading above 93 for the first time since early April.

USD/JPY edged higher to 110.32, EUR/USD was largely flat at 1.1736, just above a four-month low, GBP/USD was flat at 1.3845, while the risk-sensitive AUD/USD fell 0.1% at 0.7323.

Helping the dollar’s tone was the release of the U.S. Labor Department’s monthly Job Openings and Labor Turnover Survey on Monday, which showed that job openings increased by 590,000 to a record-high 10.1 million on the last day of June.

This followed on from Friday’s official U.S. jobs report, where nonfarm payrolls rose by 943,000 in July, more than expected, while numbers for May and June were also revised up.

This labor market strength has prompted the market to reassess when the Federal Reserve will start to rein in its $120 billion asset-purchase program, potentially starting to taper this year with higher interest rates following as soon as 2022.

Federal Reserve policymakers have also started to guide the market towards an early tapering. Atlanta Fed President Raphael Bostic stated Monday he is eyeing the fourth quarter, if not earlier, for the start of a bond-purchase taper, while his colleague from Boston, Eric Rosengren, suggested September for the tapering announcement.

The next major event risk for the foreign exchange markets will be the release of U.S. consumer inflation data on Wednesday, particularly as the question over whether a well-flagged and gradual tapering could still upset asset markets.

“A litmus test here may be Wednesday's release of U.S. July CPI, expected to peak around the 5.3/5.4% year-on-year area,” said analysts at ING, in a note. “Any higher, especially if the core were to surprise on the upside, could suggest that the Fed's exit from loose policy may not be quite as relaxed as most think.”

Elsewhere, USD/CNY fell 0.1% to 6.4791 after China’s central bank stated in its latest quarterly report that inflation pressures are “controllable,” while also flagging risks to the economic growth outlook.

This report has raised expectations that the central bank may shortly announce another reduction in the reserve requirement ratio for banks after July’s surprise cut.

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