The U.S. dollar experienced a significant rally on Friday following a stronger-than-anticipated December jobs report, bolstering expectations that the Federal Reserve might pause its interest rate cuts at its upcoming policy meeting. Further strengthening the dollar was a report indicating a surge in U.S. consumer inflation expectations for the coming year and beyond.
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Dollar Strengthens Against Major Currencies
Following the release of the positive economic data, the dollar reached its highest point since July against the Japanese yen before slightly retracting. The euro, conversely, fell to its lowest level against the greenback since November 2022, marking a second consecutive week of decline. A recent Reuters poll revealed that a considerable number of foreign exchange forecasters predict the euro to reach parity with the dollar by 2025.
December Jobs Report Exceeds Expectations
The catalyst for the dollar’s surge was the Labor Department’s report revealing a substantial increase of 256,000 jobs in December, exceeding economists’ predictions of 160,000. While the November figure was revised downward to 212,000, the overall trend remained positive. The unemployment rate also dipped to 4.1%, defying expectations of 4.2%. Average hourly earnings saw a 0.3% rise, following a 0.4% increase in November, contributing to a 3.9% year-over-year wage growth.
Inflation Expectations and Fed Policy
Jane Foley, head of FX strategy at Rabobank in London, noted that the robust jobs data eliminates the urgency for the Fed to implement rate cuts. She suggested that the Fed might only cut rates once this year, and potentially not at all if incoming policies are inflationary. A University of Michigan consumer sentiment survey further supported the dollar, revealing a jump in one-year inflation expectations to 3.3% in January, the highest since May, and exceeding the pre-pandemic range.
Market Response and Future Outlook
In response to the economic data, the U.S. rate futures market now fully anticipates a pause in the Fed’s easing cycle at the January meeting, with only 27 basis points of easing priced in for 2025. Meanwhile, the British pound weakened against the dollar, reaching its lowest point since November 2023, influenced by a sell-off in gilts and concerns surrounding British government finances. In Japan, the potential for sustained wage increases and rising import costs due to a weaker yen have increased focus on inflationary pressures within the central bank. The dollar index, a measure of the greenback against other major currencies, climbed to its highest level since November 2022, marking its sixth consecutive weekly gain.
Michael Brown, senior research strategist at Pepperstone in London, cautioned that the primary risk to the dollar’s bullish trajectory could be profit-taking and risk reduction ahead of upcoming political events. However, the current economic indicators point towards continued strength for the U.S. dollar.
