Non-Farm Payrolls Was Strong, But Can the Dollar Rally Continue?

Concerns about US economic growth have now been pacified by the strong level of hiring in May and June. The US dollar, stocks and yields are all up on the day as the latest piece of good news injects the market with a shot of optimism (See our NFP Instant Insight for details on the payrolls report).

A rebound in growth in the second half of the year is far more likely at this point than a slowdown. Although the problems in the housing market have not gone away, as long as the labor market remains steady, they will not exacerbate. With oil prices rising to a 10 month high today, expect the dollar to continue to gain in the week ahead barring any surprise intervention or moves by other central banks. Federal Reserve Chairman Ben Bernanke will be speaking about inflation and the risks are clearly skewed to the upside. When oil prices were above $70 exactly one year ago, inflation shot up globally. There is no reason for pricing pressures to be different this time around. In fact, the dollar is weaker now than it was then on a trade weighted basis, which means the inflationary pressure could be even greater. Strong and tough words by Bernanke could drive further dollar strength, especially against the Japanese Yen. Aside from Bernanke?s comments, we are also expecting the trade balance and retail sales at the end of next week. The trade balance is expected to improve while retail sales are predicted to be particularly weak. In fact, expectations are so low that a small upside surprise could still be dollar positive.