In response to a remarkably robust jobs report, the US dollar exhibited its most substantial surge in a span of two weeks, swiftly reclaiming levels seen prior to the Federal Reserve's policy shift in December.
This unforeseen uptick caught traders off guard, especially those who had been anticipating imminent interest-rate cuts. The Bloomberg Dollar Spot Index marked an impressive rise of up to 0.7%, bolstered by the positive employment data for January, which not only revealed a significant surge in payrolls but also showcased an accompanying boost in hourly wages.
This surge in bond yields further fueled the dollar's resurgence, with the greenback against the yen recording an impressive 1.3% increase, reaching 148.34. This marked its most substantial intraday advance since December 19 as reported by Bloomberg.
Importantly, the strength of the US dollar was evident across all Group-of-10 currencies, with the Norwegian krone, yen, and New Zealand dollar experiencing the most substantial losses. Notably, the Swiss franc and euro each faced their most significant drops in a month.
Analysts, including Patrick Locke, a foreign-exchange strategist at JPMorgan Chase & Co., interpreted the message from the payrolls report as a clear indication that the dollar will maintain its strength as long as the demand for jobs in the US remains robust, coupled with steady wage growth. This scenario, in essence, reinforces the narrative of US exceptionalism in the global economic landscape.
The jobs report unveiled on Friday showcased a remarkable addition of 353,000 workers to US payrolls in January, coupled with a 0.6% monthly surge in hourly wages. This surge marked the most substantial increase since March 2022.
The implications of this data were not confined to the currency market; it triggered a surge in Treasury yields across the curve, propelling the US dollar back to levels seen before Federal Reserve Chair Jerome Powell hinted at potential policy easing in December.
In response to the strong jobs report, swaps traders recalibrated their expectations, revising down the likelihood of a March interest-rate cut to around 15%, while still maintaining high odds of the Fed initiating a series of cuts in May.
Patrick Locke noted that the anticipated pace of cuts appeared aggressive compared to other central banks, a factor that could potentially act as a supportive element for the US dollar.
Looking ahead into 2024, initial forecasts had suggested that the yen would benefit the most from divergent central bank monetary policies, with the Fed approaching its easing point while the Bank of Japan contemplated a shift from its long-standing negative-interest-rate policy.
However, uncertainty persists regarding the timing of such a shift. Resilient US economic data have cast doubt on the extent of rate cuts expected from the Fed, while the Bank of Japan has provided limited clarity on when it might consider tightening its policy.
Contrary to expectations, the US dollar is poised for its fifth consecutive week of gains, marking the lengthiest streak since September. The Japanese currency, on the other hand, has endured a nearly 5% loss this year, ranking as the weakest performer among the Group of 10 currencies. This continued depreciation is attributed to persistent pressure resulting from delayed expectations of Fed easing.
Jane Foley, the head of FX strategy at Rabobank, highlighted that a delayed initiation of Fed easing suggests a more resilient USD and consequently implies less room for substantial JPY gains against the USD, assuming the Bank of Japan decides to hike rates in the next couple of months as we read in Bloomberg.
The evolving dynamics between the two central banks continue to shape the trajectory of these currencies in the global market, adding a layer of complexity to the broader economic landscape.
02.02.2024
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