US Dollar: Payrolls risk supports near term gains – OCBC

OCBC analysts Sim Moh Siong and Christopher Wong note that strong US economic data, rising Treasury yields, and higher oil prices are currently supporting the US Dollar. The upcoming US labor market report is seen as a crucial event, with potential upside surprises in payrolls boosting expectations of the Federal Reserve tightening monetary policy.

Bloomberg analysts anticipate nonfarm payrolls to increase by 90,000 in September, slightly below the 162,000 gained in August, while the unemployment rate is predicted to stay steady at 4.1%. While the Federal Reserve Chair has emphasized the four-week average of initial jobless claims as a key labor market indicator, market participants generally view payrolls as a more reliable gauge of labor market health.

The base case remains for a gradual USD rally into year-end. However, the outlook is tempered by factors such as the gradual appreciation of the Chinese Yuan and improving prospects for the Japanese Yen as Japan's policy environment becomes more favorable. In the short term, the dollar could potentially overperform if Middle East tensions persist, driving energy prices higher and inflation concerns deepen.