Dollar Surges as Wage Gain Supports Case for Fed Rate Increases

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  • Greenback up from 3-month low versus euro, pares weekly drop
  • U.S. jobless rate declines to eight-year low of 4.9 percent

How Will U.S. Jobs Report Impact Fed Rate Policy?

The dollar rebounded from a three-month low against the euro after a U.S. employment report showed wage growth that exceeded estimates, bolstering the case for the Federal Reserve to continue raising interest rates this year.

The greenback climbed versus most of its major peers after data showed average hourly earnings rose 0.5 percent, hinting at a pickup in inflation toward the central bank’s 2 percent target. The jobs data provided temporary relief for the dollar, which posted the biggest two-day decline since 2009 this week on concern slowing economic growth may force the central bank to reverse its tightening course.

"The U.S. dollar is moving in reaction to the firmer result for average hourly earnings and the drop in the unemployment rate,” said Bipan Rai, director of foreign-exchange strategy in Toronto at Canadian Imperial Bank of Commerce’s CIBC World Markets unit. "Both of which suggest that the market may have gotten a bit ahead of itself in terms of Fed expectations over the past few sessions." 

The greenback’s gains have stalled in 2016 as evidence piled up that the world’s biggest economy won’t escape slowdowns from China to Canada and Brazil. That’s a departure from the trend in the past two years as investors bet the Fed would tighten monetary policy as the economy improved in contrast with other central banks that were carrying out unprecedented stimulus.

The U.S. currency added 0.5 percent to $1.1158 per euro at 5 p.m. in New York. It rose 0.1 percent to 116.87 yen. The Bloomberg Dollar Spot index, which tracks the U.S. currency against 10 global peers, strengthened 0.6 percent, trimming its weekly loss to 1.9 percent.

Employment Watch

The nation’s jobless rate fell to 4.9 percent, an eight-year low, even as the U.S. created 151,000 jobs, trailing the 190,000 forecast by economists surveyed by Bloomberg.

"It should be somewhat supportive to the dollar," said Kathy Jones, New York-based chief fixed-income strategist at Charles Schwab & Co. "It certainly wasn’t strong enough to send it back to the highs, but it introduces the possibility of a rate hike some time later this year if the Fed is really just focused on the labor market."

The Fed lifted its target rate by 0.25 percentage point in December after holding it near zero for seven years, and policy makers forecast four more increases this year. Interest-rate derivatives traders had priced out a 2016 rate hike earlier this week as plunging oil prices and elevated global market volatility challenged U.S. inflation and economic growth.

"The currency markets have recently traded on an extremely dovish Fed in 2016 -- our view is that that’s probably been overdone," said Chris Molumphy, chief investment officer of Franklin Templeton’s fixed income group in San Mateo, California, which manages $153 billion.