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Dollar attempts to extend dominance into New Year

The promise of a stronger US dollar was most recently established late in 2016 after Donald Trump’s unlikely November election victory sparked higher bond yields, and the Federal Reserve followed up in December with a well-anticipated interest rate hike. By raising rates and then further providing an accelerated tightening outlook for 2017, the Fed has effectively widened its monetary policy divergence from the generally dovish stances of other major central banks. As a result, the dollar has continued to dominate against other major currencies, most notably the euro and Japanese yen.

Against the euro, the US dollar reached a very long-term high on the first major trading day of the new year – EUR/USD dipped to a new 14-year low around 1.0340 on Tuesday before paring much of its losses. Against the yen, the dollar’s recent rise has been equally relentless. USD/JPY started the new year on Tuesday by closely approaching December’s 10-month high of 118.65 before pulling back sharply.

The dollar’s exceptional rally of the past two months has been well-supported by fundamental forces that continue to exert upward pressure on the currency. Trump’s spending plans have fanned expectations of a rise in inflation and interest rates, thereby helping to fuel the dollar’s surge. The Fed’s December rate hike and increasingly hawkish outlook have further boosted the dollar, as have highly positive US economic data releases in recent weeks and months. Most recently, Tuesday’s US ISM Manufacturing PMI data was better than expected at 54.7 against 53.7 expected.

The first week of 2017 will continue to bring key economic events that should continue to move both the US dollar and USD/JPY currency pair. Wednesday features the minutes from December’s critical FOMC meeting, which should further clarify the Fed’s more hawkish stance. Thursday brings the important ISM Non-Manufacturing PMI, currently expected to print 56.6. Finally, of course, is Friday’s key US jobs report for last month – the Non-Farm Payrolls data is expected to come out at around 175,000 jobs added in December.

Clearly, any in-line or better-than-expected data could further fuel the strong dollar, extending its well-entrenched uptrend. As for USD/JPY, the key downside support level to watch continues to be around the 116.00 level, which represents the bottom of the recent pullback. As long as the currency pair remains above 116.00 and then further breaks above the 118.00 level, the sharp USD/JPY uptrend should remain strongly intact. In the short-term, such a breakout should boost USD/JPY towards its next major upside targets at the 120.00 psychological level followed by the 121.50-area high of last January.

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