The U.S. Employment Situation report came in lighter than expected, giving some investors a sign of relief. However, an interest rate hike is still in the cards later this year. The U.S. Dollar Index is one index that investors should watch around the times of key economic news.
The U.S. Dollar Index at a Glance
The U.S. Dollar Index measures the value of the U.S. in relation to a basket of major foreign currencies of U.S.’s key trading partners. As of 2016, the U.S. Dollar Index is calculated using a weighted geometric mean of the U.S. dollars value relative to other currencies.
Currently, the U.S. Dollar Index includes the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The weightings are: 57.6% euro (EUR), 13.6% Japanese yen (JPY), 11.9% British pound (GBP), 9.1% Canadian dollar (CAD), 4.2% Swedish krona (SEK) and 3.6% Swiss Franc (CHF). The U.S. Dollar Index will appreciate in value when the U.S. dollar strengthens in relation to this basket of currencies.
Since the U.S. Dollar Index hangs on the U.S. economy and how other economies are performing in relation to the U.S., currency traders should always focus on upcoming economic releases and central bank meetings.
U.S. Dollar Performance Around Economic News
The U.S. Jobs report has been in focus due to the Fed’s comments during the Jackson Hole summit in late August 2016. The Federal Reserve’s move to raise interest rates may come sooner, rather than later. The Federal Reserve Chairwoman Janet Yellen indicated during the Jackson Hole summit that the case to raise rates has strengthened. This was prompted to the strong U.S. Employment Situation reports for two consecutive months for the months of June and July.
In June 2016, nonfarm payrolls came in better than expected at 287,000, non-revised, topping the consensus estimate of 180,000. This was a significant month over month increase from May’s dismal jobs report.
In July 2016, nonfarm payrolls increased by 255,000, non-revised, while economists were expecting a gain of 180,000. Moreover, the unemployment rate remained below 5%, at 4.9% over those months. Consequently, this indicated to the Fed that the U.S. economy is strengthening and it should consider raising rates.
However, the confidence in the U.S. jobs market was brought down with the release of the August U.S. Employment Situation on September 2, 2016. Now, the argument for an interest rate hike in September may be off the table. Nonfarm payrolls for the month of August came in light at just 151,000, while the consensus estimate was 175,000.
The unemployment rate missed estimates by 0.10%, while economists were looking for 4.8%. Additionally, private payrolls only increased by 126,000, while the consensus estimate was looking for an addition of 179,000. Consequently, the report weakened the argument for a rate hike.
U.S. Dollar Index and Economic Data
The U.S. Dollar Index fell from 95.72 at 8:25 AM ET to a low of 95.19 at 8:35 AM ET, after the report came out, on September 2, 2016. This drop reflected market participants’ expectations of an interest rate hike during the September meeting. Since an interest rate hike would cause the U.S. dollar to appreciate, the weak jobs report indicated that an interest rate hike is note likely soon, which caused the U.S. Dollar Index to fall.
However, according to SternOptions.com Analyst Anthony Di Maggio, currency traders should keep a close eye on the next FOMC meeting and follow Fed officials' comments regarding the economy, as these catalysts could shake the markets.
Major market indices suffered large losses due to negative sentiment regarding central banks' stimulus programs. This sent stocks and bonds tumbling. The growing concerns of a Fed rate hike pushed the U.S. Dollar Index higher to 95.35, while the SPDR S&P 500 ETF Trust fell 2.38% on September 9, 2016. With the Fed meeting coming up, investors should expect increased volatility in the equity and currency markets.
The European Central Bank decided to leave its monetary policy unchanged, which shocked some investors. With global macroeconomic concerns rising, all eyes are on the Fed's September meeting.
The Bottom Line
Economic data and Fed comments that show signs of a potential interest rate rise should affect the U.S. Dollar Index and various currency pairs, such as EUR/USD, JPY/USD, GDP/USD and CHF/USD. Therefore, currency traders and investors should keep an eye on the index and these pairs around the release of the FOMC Meeting.
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