Risk-off mood supports dollar strength
The US Dollar (USD) has become increasingly sensitive to intra-day moves in US equity markets, reflecting heightened investor concerns over tech and AI valuations and the potential for a year-end sell-off as risk appetite fades. It remains another strong year for the Nasdaq Composite, which is up 16.2% year-to-date. Since the low point following the Liberation Day tariff announcements, the Nasdaq has surged 47%. The current correction from its recent closing high stands at 6.4%—the largest since the Liberation Day sell-off, according to MUFG FX analyst Derek Halpenny.
“Nvidia will announce its Q3 earnings later today, marking the near-end of the Q3 earnings season. Results have been solid. As of last Friday, Factset reports that 92% of S&P 500 companies have released earnings, with 82% showing positive EPS surprises and 76% reporting revenue beats. Blended earnings growth is tracking at 13.1% annually, which—if sustained—would mark the fourth consecutive year of double-digit growth. This compares favorably to the 7.9% growth forecasted at the end of September. However, valuations remain elevated, with the 12-month forward P/E ratio at 22.4, above the 5-year average of 20.0 and the 10-year average of 18.7.”
“Once Nvidia’s earnings are released, attention will quickly shift to the delayed September Nonfarm Payrolls report due tomorrow. ADP weekly data revealed another drop in the 4-week average, consistent with broader indicators of labor market weakness. With two more NFP reports expected before the December FOMC meeting, market reaction may be somewhat contained. However, further equity declines could increase the likelihood of the FOMC approving an ‘insurance’ rate cut in December, as suggested by Fed Governor Christopher Waller.”
“Given the current positive correlation between equities and the dollar—possibly reflecting renewed concerns over a tech/AI-driven correction impacting the broader US economy—a disappointing earnings report tonight could weaken the dollar. Still, the focus will quickly return to economic fundamentals, and the labor market will ultimately determine the dollar’s direction heading into year-end.