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The Dollar Continues to Gain as Rates Move in the Greenbacks Favor

David Becker
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The Dollar Continues to Gain as Rates Move in the Greenbacks Favor

The European Central Bank stayed on hold in November, as expected by economics, and President Mario Draghi said the ECB responded to the outlook for low inflation, a weakening growth and tame inflation with the measures already announced. The dollar has been buoyed by a stronger interest rate differential, and solid growth as reflected with decent jobs numbers.

The comments in Draghi’s press conference led market participants to believe that a greater response will likely be coming but for now the current programs should be sufficient. This included the asset purchase program, which concentrates on covered bonds and ABS as well as the TLTRO program, which will continue with the second tender in December. Draghi also said that the measures will have a sizeable impact on the central bank’s balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012.

Given that the ECB will publish new staff projections next month, this could already be the opportunity to implement such measures, although on balance the central bank could be on hold this year, unless there is a renewed deterioration in confidence indicators. Part of the dovishness of Thursday statement may have been due to the fact that the central bank clearly is eager to keep the EUR down and that the BoJ’s additional easing measures had to a certain extent taken the shine out of the ECB’s bazooka moment.

Draghi could still tweak the conditions for future TLTRO’s at the coming meeting.

The dollar’s yield advantage continues to increase against the euro and yen, with the 10-year yield differential climbing to 155 basis points and the yield differential above the JGB moving to a robust 190 basis points. The increase in the interest rate differential has helped push the Euro to multi-year lows against the greenback.

On Friday the Department of Labor announced that jobs growth in the U.S. increased by 213K jobs compared to the 220 expected by economists. Revision to the prior 2-months showed an increase of nearly 40K jobs, while the unemployment rate dipped to 5.8%.

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