All things considered, Thursday should be a good day for the dollar.
Events Thursday could be important for markets for months to come. The two central banks that arguably have the most impact on the course of the greenback will make it clear they are on extreme opposite policy tracks – the U.S. Federal Reserve and the European Central Bank (ECB).
Fed Chair Janet Yellen is expected to testify before Congress Thursday and reiterate why the Fed believes it could raise interest rates for the first time in nine years as soon as this month – a dollar positive. Her comments Wednesday briefly drove the dollar index to a fresh 12-year high.
But before Yellen's 10 a.m. ET testimony, the ECB holds an early morning rate meeting, and is expected to announce at 7:45 a.m. ET that it is expanding and extending its quantitative easing program, as well as possibly taking already negative interest rates lower. That should add pressure to the euro, which has been weakening, and help lift the dollar index.
Markets were on edge Wednesday, as oil plunged nearly five percent amid competing comments from OPEC members, and a new government report of more supply building in the U.S. that weighed on stocks, as did concerns that the Beige Book showed a still soft manufacturing sector.
The mass shooting in San Bernadino, Calif. which took place during market hours, also made traders nervous that the situation could have been the work of terrorists. By the end of trading, it was not clear who was responsible for the shootings.
"You've got a couple of things going on. Oil broke below $40. That started the initial move down when Yellen finished. They looked at the Fed tan book and were not particularly happy with that. The question of whether the Fed is making a mistake still lingers out there.Then, of course, there's a multiple shooting with the risk it might be terrorist-related. Either way, if it's (terrorism) reached within the United States that's going to make the markets more nervous," said Art Cashin, director of NYSE floor operations at UBS.
The euro weakened in early afternoon trading after a report suggested that euro zone inflation could be even weaker than expected.
The euro should slip on the ECB action, at least initially. "The ECB could be worth one or two cents," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman.
Chandler said the dollar should benefit from the ECB and could stay firm as the jobs report is released Friday. He said the strong ADP report Wednesday of 217,000 private sector payrolls encouraged investors to expect a solid government employment report Friday. That November jobs report is the last important piece of data Yellen and the Fed will get before the Fed decision Dec. 16.
"They'll maybe 'buy the rumor, sell the fact' (on the dollar) -- in front of the jobs data and when the FOMC meets in the middle of the month," said Chandler. "It's going to suck more people in with the momentum and leave them vulnerable for profit taking after the fact. This is a short term move. Medium and longer term, the dollar is in a long uptrend, and the correction is an opportunity to get long."
While Goldman Sachs has said it expects the euro to reach parity with the dollar this year, Chandler and others do not expect it until next year. Chandler said the length of time of the dollar's uptrend will also be influenced by the timing of central bank divergence, so the ECB's extension of its QE program is important.Chandler said there's a chance it could last until March, 2017.
"That means the policy divergence will last a long time. We're still in the early days. The Fed hasn't even raised rates yet. The 2-year interest rate differential between the U.S. and German is making new multi-year highs today,at 140," said Chandler.
"In 2011, Germany offered the same premium over the U.S." The German 2-year touched negative 0.43 percent Wednesday, while the U.S. 2-year note was yielding around 0.94 percent in late trading.
Boris Schlossberg, managing director, foreign exchange strategy at BK Asset Management, said he also expects the dollar to give back some gains in the not too distant future, before moving higher again.
"We'll certainly see a correction by FOMC day unless she (Yellen) comes out unexpectedly hawkish which I don't think we'll see. Generally, the dollar has sold off later. The rate hiking cycle has started, then it picks up steam again once the cycle goes full force. There's very much a possibility of 'sell thenews' with the dollar," Schlossberg said.
Chandler said technically the dollar index move Wednesday above 100.39, the March high, puts it on the more immediate path to 101.80. That level is the 61.8 percent retracement of the move from the 2001 peak of 121 to the 2008 low of 70.70. Chandler said the next major moves would be to old cycle highs and ultimately the 121 level.
"I think the dollar is very close to its peak value for the time being. Even if they do raise rates, they're going to communicate it's one and done for the time being," said Schlossberg. He said he expects the euro to reach parity with the dollar but it could take a while and the U.S. economy will have to see a pickup.
Yellen is being watched carefully because some traders worry the Fed is hiking rates before the economy is strong enough. Weak ISM manufacturing data that showed contraction spooked the bond market Tuesday.
John Briggs, RBS head of strategy said Yellen on Wednesday was less negative about the influence of international developments and China on the U.S. economy. She was also more confident that inflation would move back to target, and she described risks as "very close" to being balanced.
"I think she reaffirmed the sense they are on track to start raising rates in December," he said, adding he expects more of the same in her testimony before the Joint Economic Committee Thursday.
Besides Yellen's comments, there are comments from Cleveland Fed President Loretta Mester and Fed Vice Chairman Stanley Fischer, who speak on financial stability, at 1:10 p.m. in Cleveland.
ECB President Mario Draghi will speak at 8:30 a.m. ET, after the ECB release.
ISM nonmanufacturing data at 10a.m. will be important since ISM manufacturing data showed contraction in the sector. Jobless claims are released at 8:30 a.m. and factory orders are at 10 a.m.
The dollar index is seen as a limited metric since it is heavily influenced by the euro, and analysts expect the dollar's big move could be against emerging markets and other currencies,which are not included in the index.
The dollar index represents a calculation of six currencies against the dollar, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Prior to the creation of the euro, the index included the German mark, French franc, Italian lira, Dutch guilder and the Belgian franc.