Is the dollar still vulnerable after Fed?

“The U.S. dollar extended its decline on Monday, having fallen last week by the most since July after the Federal Reserve dialed down its hawkish rhetoric and U.S. data showed signs of moderation.

The dollar index was hovering around a 6-1/2 week low of 104.84, after falling around 1.4% last week.

The euro gained 0.2% to a 7-1/2 week high of $1.0756.

World stocks (.MIWD00000PUS) too had their strongest week in a year last week as expectations the Fed was done raising rates gathered steam.
Other indicators such as weakness in U.S. jobs data, softer manufacturing numbers and a decline in longer dated Treasury yields also hurt the dollar, while stoking rallies in sterling and the Aussie dollar , and causing the yen to bounce from the weaker side of 150 per dollar.

“We always say bad news (weak economic data) is good news,” said Tina Teng, a market analyst at CMC Markets in Auckland. “So it’s good then there is expectation for the Fed and other central banks to end the rate hike cycle sooner.”

She expected the dollar to remain on a weaker trend through November.

Dane Cekov, senior FX strategist at Nordea, called last week’s moves an “over-reaction”, saying the jobs data was a “mixed bag”.
“You could still see a somewhat weaker dollar in the short-term, but if the (euro-dollar) rally continues it needs to get some fuel from somewhere.”

JPMorgan analysts say a sustained dollar sell-off would need signs of improvement in the euro zone, China and other regions, which it says are “still tenuous”.

The latest growth and inflation data from the euro zone and manufacturing surveys from China bear that out.

Euro zone recession fears hardened on Monday after a survey showed a downturn in business activity accelerated last month as demand in the services sector weakened further.

“Final PMIs released today … are consistent with our forecast that euro-zone GDP will contract again in Q4,” said Capital Economics Europe economist Adrian Prettejohn.”

“They also suggest that price pressures are continuing to ease.”

Futures markets imply around an 80% probability the European Central Bank will be cutting rates by April and around a 90% chance the Fed has done hiking, with an 86% chance the Fed’s first policy easing would come as soon as June.

Fed Chair Jerome Powell speaking of balanced economic risks sent Treasury yields lower last week, with further declines after the softer U.S. data.

The U.S. government also cut its refinancing estimate for this quarter, and announced lower increases in long-dated debt auctions than expected.
Yields on 2-year notes have dropped 25 basis points in roughly two weeks, while 10-year yields languished near a five-week low and last stood at 4.593%. The front end of the curve remains deeply inverted.”