US data looking good, so why did the dollar drop? 5 reasons

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A big bulk of US figures came out above expectations, at least in the figures that matter most. However, the US dollar stalled its rally, against quite a few currencies.

Why did this happen? Here are 5 reasons

US annual inflation rose to 2%, as expected. More importantly, core inflation exceded expectations and advanced to 1.8%, more than 1.7% foreseen by economists. Core inflation is certainly where the Fed wants it to be. This is great news and allows the tapering to continue untouched. If this continues, a rate hike could come earlier in 2015.

The Fed’s second target, employment, is also showing more positive signs: weekly jobless claims dropped below the magical 300K line and touched 297K, the lowest in 7 years. Also here, more data is needed to be sure this not a one off, but the news is great.

And speaking of the Fed, both the Empire State and the Philly Fed manufacturing indices beat expectations, with 19 and 15.4 points accordingly. We have seen disappointments from industrial output which dropped 0.6% the capacity utilization rate.

However, USD/JPY dropped and remains low, and EUR/USD bounced from its lows around support at 1.3650. Why?

  1. Due correction in EUR/USD: after more ECB commentary as well as poor GDP data pushed the euro even lower, we have seen a much needed bounce. The pair was going downhill since Draghi made the statement about an imminent rate cut, and never corrected. A correction is necessary for more falls.
  2. Japanese GDP: Here, good news from Japan, a stronger GDP report, means less stimulus from the BOJ, and the yen rose higher, ignoring everything else.
  3. Ukraine worries: the ongoing tensions between Russia and Ukraine, this time regarding the gas bill, worries investors. They move away from stocks to bonds, and this in turn makes US bonds and the US dollar less attractive . Note that this comes despite the end of QE in sight.
  4. Stock bubble talk: another reason for the weak stock markets, weaker bond yields and less attractive USD is the growing talk about a bubble in tech stocks, which have certainly surged in past years. Are stocks overvalued? The debate is open about this. What is more clear is that with bond yields dropping, the greenback is less attractive.
  5. Yellen: The Chair of the Fed is speaking later on. Janet Yellen is usually dovish and refrains from hawkish comments (apart from her first rate decision). The markets may be awaiting some dovish talk to weaken the dollar.

What’s next for the greenback?

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