In the past few months, the dollar has mainly been traded as a safe haven asset. It had a tendency to weaken when strong economic data were released. For instance, the recent slew of positive economic data out of the US and Europe reinforced expectations that the worst of the global downturn was over. This encouraged investors to take on more risks. Stocks surged and crude oil prices jumped above USD68 a barrel. The dollar and Japanese yen, considered to be safe havens, lost much ground. The greenback fell to multi-month lows versus the Australian and New Zealand dollars. Even the British pound, weighed down by concerns about British Prime Minister Gordon Brown’s political future, rose against the US dollar.

But the dollar’s reaction to the latest US nonfarm payroll report released on June 5 was quite different. American employers cut 345,000 jobs in May, less than consensus forecast of a decline of 520,000. While the data still reflected the 17th consecutive month of job losses, they showed that the extent of the decline has been easing steadily since the start of the year. The report not only raised recovery hope, but also led investors to price in an increasing probability of a rate hike by the Fed before the year end. Such expectations sent the dollar surging. While the greenback jumped over 1% against all majors, it was not adequate to compensate for the losses suffered in previous days. For the past two weeks, the euro gained some 3.4%, the Australian dollar 5.6%, against the US unit.

The reaction shows that perhaps investors are moving away from the risk appetite theme, and begin to focus on the dollar’s own fundamentals. But this may not spell a dollar uptrend as other economies are also improving.