A poorly performing U.S. dollar slightly rebounded against major currencies as Friday’s U.S. employment data showed less-than-expected growth in July. Investors also reacted to President Trump’s firing of the Bureau of Labor Statistics Commissioner Erika McEntarfer, ahead of the Fed’s decision on interest rates.
Fed Governor Adriana Kugler’s unexpected resignation and Trump’s firing of a top labor official dealt a blow to the U.S. dollar, sinking it 1.5% against the Euro and 2% against the Japanese Yen. The U.S. dollar also lost more than 1% against a basket of world currencies on August 1.
However, the greenback rebounded against the Yen today, trading at 146.60 Yen, 0.14% higher. The Euro and the Sterling Pound also fell 0.2% to $1.156 and 0.1% to $1.3263, respectively. The U.S. dollar slightly increased by 0.2% against the basket of currencies to 98.86.
The greenback also rose 0.8% on August 1 against the Australian dollar, but slipped by roughly 0.17% to $0.6465 on August 4. New Zealand’s dollar also fell 0.24% to $0.5905 on Monday morning, while the Swiss Franc saw little change, exchanging at 0.8041 per U.S. dollar. The 2-year treasury yield dropped to a three-month low of 3.659%, while the 10-year treasury yield fell to a one-month low of 4.206%.
Sycamore says market reaction was ‘swift and decisive’
Tony Sycamore, an IG market Analyst, said the market reacted decisively and swiftly on Friday following the turn of events. He pointed out that the U.S. dollar, equities, and yields tumbled as investors saw a 95% chance of a September Fed rate cut.
David Doyle, the Head of Economics at Macquarie Group, also confirmed calls for the FOMC to cut rates by 25 basis points in September. He added that the results of the weak U.S. labor market report were likely to change the balance of risks to the FOMC’s assessment of its outlook.
MRB Partners recently expressed concerns over the escalation of ‘long-term debt imbalances,’ arguing that removing the Fed’s independence would lead to this unsettling development. They added that maximizing near-term economic growth through monetary policy could have a similar effect. The privately-owned research firm also pointed out that these developments could increase the instability of the U.S. financial system and economy.
“It would also increase instability of the U.S. economy and financial system, provided that the initial positive growth consequences were not aborted by a full-blown bond market riot.” – MRB Partners , an Independent research firm
MRB claimed the U.S. debt could become more volatile as the Trump administration sought to maximize short-term growth by dangerously tying servicing costs to short-term rates.
The research firm added that the actual cost “savings” could be exaggerated as the yield curve for short-term treasury bills became “less liquid.”
MRB warns of ‘a dire scenario’
MRB warned of a “dire scenario” if faith in the U.S. government’s ability or willingness to repay its debts faltered. The research firm also warned that markets could shun even treasury bills and force the Fed to print more money and buy government debt directly. MRB suggested that this development was a sure way for the greenback to lose its status as the world reserve currency.
MRB said the U.S. economy could become more reliant on short-term interest rates remaining low over time, leading to the central bank’s reluctance to “lift policy rates,” even when inflation became a problem.
Ironically, the research firm claimed that the Fed’s sway over the country’s day-to-day economic activities would increase. The entire economy would become “hypersensitive” to the Fed’s moves, increasing risks of an unintended recession.
MRB also pointed out that the private sector was unlikely to be unscathed. It argued that this was one of the many reasons Trump kept insisting on deeper Fed rate cuts. However, the effects of a “politicized Fed” would probably be witnessed in the debt market.
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