Dollar bounces back ahead of key central bank week

The greenback has rebounded this week on the back of another batch of robust data out of the US economy, including today’s non-farm payrolls report. That stands in sharp contrast to the continued weakness in the euro-zone, where data on the German industrial sector disappointed yet again and the probability of a recession continues to increase. However, despite the diverging fortunes of the US and European economies, expected interest rates have shifted down sharply on both sides of the Atlantic over recent weeks, leaving the gap between government bond yields in a broadly unchanged. (See Chart 1.) But despite its recent underperformance, the euro does not appear to fully reflect the enduring gap between US and the euro-zone yields, which probably leaves some room for further weakness in the near term.