• Currency slumps versus havens as global stocks endure rout
  • Employment gains top forecast, backing rate-increase scenario

For dollar bulls, policy makers in China navigating currency and stock market turmoil may compete with U.S. economic performance for attention from the Federal Reserve.

The greenback fell versus traditional haven currencies, posting its worst weekly loss versus the yen since August 2013, as China’s moves to manage the yuan precipitated a stock rout and fueled risk aversion around the world. The dollar, meanwhile, rallied versus commodity-exporting and emerging-market peers as a better-than-forecast U.S. jobs report showed domestic economic strength, in contrast with slowing growth elsewhere.

Five-day view: Safe havens rally versus the dollar as higher-yielders fall.
Five-day view: Safe havens rally versus the dollar as higher-yielders fall.
Source: Bloomberg data

That has investors seeking to discern the Fed’s priorities when it considers more rate increases. Last year, strength in the dollar and volatility in emerging markets were among the reasons that encouraged the central bank to stand pat. Richmond Fed President Jeffrey Lacker said Jan. 7 that the economy is strong enough to merit additional rate increases, “barring subsequent shocks.”

“It’s likely to continue to result in a mixed market for the dollar,” said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington. “If volatility is sustained over a period of time, it’s likely to decrease the odds of further Fed rate hikes, at least at the pace that the market’s pricing in, and that’s obviously negative for the dollar.”

The dollar slumped 2.7 percent against Japan’s currency from a week earlier, closing the week at 117.26 yen, reaching the weakest level since January.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, added 0.6 percent on the week. The gauge rose 9 percent last year and 11 percent in 2014.

Volatile Week

Chinese stocks suffered their worst week since August amid eight-straight cuts to the yuan’s reference rate, the fixing around which the currency is allowed to trade. Global currency volatility jumped in response, climbing the most this week since September, according to a JPMorgan Chase & Co. index.

A labor-market report Friday from the U.S. provided a bright spot for dollar bulls. The 292,000 jobs gain in December exceeded the highest forecast in a Bloomberg survey and followed a 252,000 increase in November that was stronger than previously estimated. 

“This means that the Fed continues to be on track for rate increases,” said Georgette Boele, a currency strategist at ABN Amro Bank NV in Amsterdam. That’s “good for the U.S. dollar.”

Bloomberg’s gauge of the dollar climbed to its highest in more than a decade after the release before paring gains. Treasuries two-year notes yield 0.90 percentage point more than that similar maturity bonds of Group of Seven nations, almost the highest level since 2007, bolstering the allure of dollar-denominated securities.

The Fed meets on Jan. 26-27 after policy makers raised rates in December for the first time since 2006. Traders may garner more clarity on the tone of officials’ coming discussion next week, when policy makers, including Vice Chair Stanley Fischer, make public remarks.

“They have to take into consideration global affairs,” Bill Gross, co-manager of the $1.3 billion Janus Global Unconstrained Bond Fund, said in an interview on Bloomberg Television on Friday.

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