Strong U.S. Dollar Pressures Forex, Commodities

A strong U.S. Dollar exerted pressure on Forex markets and commodities on Friday. The recovery rally may have started on Thursday, but certainly increased today after data showed the U.S. economy added more jobs than expected in November. 

Today’s U.S. Non-Farm Payrolls data was better than expected. Does it mean the economy has turned a significant corner, no. But it may be an indication that the labor market is in much stronger shape than economists want to believe. Friday’s report stated that the Labor Department added 146,000 in November while the unemployment rate fell to 7.7%, its lowest position since December 2008. 

Economists had been looking for an increase of just 80,000 with the unemployment rate remaining the same at 7.9%. Many had expressed uncertainty over the accuracy of this report because of Hurricane Sandy. 

It’s been a tumultuous week for the Forex markets. Although the EUR/USD traded near a 7-week high earlier in the week, this rally came to a screeching halt on Wednesday as traders pared positions ahead of Thursday’s European Central Bank meeting. Yesterday, the Euro fell sharply versus the dollar after ECB President Mario Draghi commented that the meeting included discussions about a possible interest rate cut. Long investors used his comments as an excuse to liquidate positions and move to the sidelines. 

The GBP/USD fell in sympathy with the Euro and on the strength of the U.S. Dollar. Thursday’s Bank of England monetary policy statement set today’s early session weak tone. The central bank is looking for more economic weakness which many traders believe could mean a revival of its asset buyback program. 

Despite periodic major hits recently and the stronger dollar today, February gold is acting resilient at current price levels which could mean it is forming a support base. Today it finished only slightly lower, indicating that perhaps the worst of the selling pressure has subsided. It’s still close enough to make at run at $1674.00, but even technical traders have to sit up and notice the trading base it is forming. 

Even a surprise rise in employment could not help January crude oil from weakening. The stronger U.S. Dollar exerted its force on crude oil from the start today. Oversupply is still a major concern and today’s weakness indicates that the state of the economy may not be that strong of a factor pressuring the market. 

Now that the U.S .employment report is out of the way, the focus shifts back to the U.S. fiscal cliff issue. There is still time to reach a compromise so the inactivity out of Washington is still not a major concern. Next week could become significant if the politicians continue to pepper the markets with negative comments. It looks as if the U.S. Dollar could suffer the most if Washington allows the economy to go over the cliff.