The dollar is sliding after the ‘horrible’ April jobs report – and has nearly erased all its gains for the year

• The dollar has fallen sharply since US jobs figures massively undershot expectations.
• The Fed’s ultra-low US interest rates and rebounds in other countries are also hitting the greenback.
• Analysts broadly expect the dollar’s weakness to continue as the global recovery picks up.
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The dollar has fallen sharply in recent days and is now back close to where it began the year after a weak jobs report knocked confidence in the US recovery.

Many analysts now expect the dollar’s weakness to continue, as recovering economies around the world draw investment away from the US, and the Federal Reserve keeps interest rates at record-low levels.

The dollar index, which measures the greenback against a basket of other currencies, was down 0.08% on Monday to 90.16.

The gauge was close to the 89.93 level of the start of January, having reversed almost all of the gains made in February and March when the US economy roared ahead of other advanced countries and the index peaked at a four-month high of 93.44.

It suffered its biggest one-day fall since November on Friday, when nonfarm payrolls figures showed the US economy added just 266,000 jobs in April, compared to the 1 million economists had been expecting.

The “horrible” undershoot led to a rally in speculative assets such as stocks and a weaker dollar, in large part because investors now expect the Fed to keep interest rates low for longer, John Hardy, head of FX strategy at Saxo Bank, said. Lower rates typically weigh on a currency, as they make investments in that country less attractive.

“That’s the knee-jerk reaction in the modern era of maximum central bank and now fiscal support at every misstep for the economy,” he said.

A strong economic recovery in other parts of the world is also likely to weigh on the greenback in the months ahead, JPMorgan analysts said in a note, by causing a “temporary time-out for US exceptionalism.” The bank recommended clients reduce their exposure to the dollar.

Traders will be focused on the consumer price index inflation data that comes out on Wednesday, which is expected to rise to 3.6% compared to a year earlier, when the pandemic hit prices.

Typically, a sharp rise in inflation would cause the Fed to raise rates, thereby boosting the dollar.

But George Saravelos, Deutsche Bank’s global head of FX research, said the Fed is more focused on unemployment figures than rises in inflation, which the central bank thinks will be transitory.

“The Fed is being driven by America’s severely under-performing ‘labor gap’, not the market’s focus on the ‘output gap’,” he said. “Last week’s payrolls report should prove a catalyst for the market to come to terms with this dynamic and opens the door to further dollar weakness.”