The US dollar grinds higher

US dollar drifting ahead of inflation, employment reports

Holiday thinned trading saw the US dollar grind higher overnight, the dollar index rising 0.30% to 93.05. The steepening of the US yield curve, and an absence of other drivers have been supportive of the greenback this week. In the bigger picture, currency markets are now drifting after the initial vaccine flurry.

The story is much the same in Asia, with the dollar index slightly lower and Asian regional currencies edging higher in directionless trading. The New Zealand dollar continues to outperform after the Reserve Bank of New Zealand left interest rates unchanged yesterday. NZD/USD rose 0.70% overnight to 0.6880 and has advanced to 0.6895 this morning. However, the kiwi may struggle to hold gains at these levels in the near-term, with a scattering of Covid-19 community cases being reported in Auckland and Wellington today. Auckland, in particular, is likely to have partial restrictions imposed again.

Although regional currencies have given back some of their gains in the last 24 hours, the price action looks corrective. We still expect that Asian currencies will outperform developed markets as we advance.

The charts are not painting any particular picture now, and I would prefer to wait and see how the price action evolves.

US Core Inflation for October will be of interest this evening, given the recent steepening of the yield curve. A reading which is worse than expected could dial back some of the vaccine steepening and see the US dollar resume its downward path. US Initial Jobless Claims are expected to edge lower for the week to 735,000, defying the predicted Covid-19 slump. If that plays out, any fiscal help from a Republican Senate will be further away than ever. This means that in the bigger picture, we can expect the US yield curve steepening to run out of steam and for US dollar weakness to return.

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