Time for a taper tantrum? Three reasons why the dollar is set to extend its gains

When the information changes, it is time for a fresh market move – the dollar is on the rise on growing speculation that the Federal Reserve will print fewer greenbacks sooner rather than later – and this trend could continue.

Here are three reasons:

1) Inflation evidence

The ISM Services Purchasing Managers' Index usually serves as a hint for Nonfarm Payrolls statistics, but this time, the Prices Paid component is what stands out. This gauge of inflation hit 80.6 points in May, the highest since 2005. The parallel Manufacturing PMI stood at a high of 88 last month.

The Federal Reserve's "Beige Book" also points to anecdotal evidence of not only rising prices but also of increasing wages – which would lead to inflation down the road.

2) America is hiring again

April's Nonfarm Payrolls shocked with a gain of only 266,000 jobs in April, which seemed odd as it contradicted other figures. It was probably a one-off, as the most recent labor figures look strong.

ADP reported a leap of 978,000 private-sector positions in May and weekly jobless claims dropped below the 400,000 mark in the week ending on May 28. 

The Federal Reserve has two mandates, inflation and employment, and both are rising quickly, pointing to a reduced need for printing $120 billion/month. 

But what does the Fed think? So far, it rejected such a notion, – giving a reason to sell the dollar – but things have changed.

3) Fed nano-tapering as the first step

Almost all officials at the world's most powerful central bank have been sticking to the mantra that inflation is transitory and that the economy has a long way to go. The lone member calling for a discussion on buying fewer bonds was Robert Kaplan of the Dallas Fed. He is not alone anymore. 

Philadelphia Fed President Patrick Harker said that the bank should be "thinking of thinking of tapering" – paraphrasing Fed Chair Jerome Powell's comments on refusing to even think of thinking of cutting interest rates. 

More importantly, the bank took the first step in cutting purchases – it ended minuscule corporate bond and ETF buying programs from the peak of the pandemic. While these programs account for only $13.6 billion, it seems like a baby step toward a bigger move. 

The dollar is already up, will this trend continue? The reason to believe so is that the Fed enters its quiet period ahead of its rate decision on June 16. That means that mounting speculation will likely continue, especially if Nonfarm Payrolls at least meet expectations. 

Conclusion

There are reasons to expect the Fed to announce the tapering of bond buys sooner than later – adding further to dollar strength.