Dollar index up on higher-than-expected nonfarm payrolls

U.S. economy adds 216,000 new jobs in December, Fed may be in no rush to cut rates

The dollar index (DXY) surged on Friday following data indicating that the largest global economy added more jobs than anticipated last month, potentially suggesting that the U.S. Federal Reserve may not be in a hurry to cut interest rates in the coming months.

Data revealed that the U.S. economy created 216,000 new jobs in December, surpassing the consensus forecast of 170,000. The unemployment rate held steady at 3.7%, in contrast to the expected increase to 3.8%. Average earnings saw a 0.4% monthly rise, exceeding forecasts of a 0.3% gain.

The dollar index, which measures the strength of the U.S. currency against a basket of its peers, reached 103.10, marking a new two-week high, but then quickly handed back its gains, last trading at 102.55 (up 0.12%).

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US interest rates: Markets price in 60% chance of Fed cut in March

Eurozone inflation data for December showed a year-on-year increase of 2.9%, up from 2.4% in November — the reading may also reduce the urgency for the European Central Bank to cut borrowing costs from record highs.

Traders on Friday assessed a 60% chance of the Fed cutting rates from their 22-year highrange of 5.25%-5.5% in March, as per the CME Group’s Fedwatch tool. This is down from a 71% probability a week ago.

Following the jobs data, the 10-year U.S. Treasury yield, which reflects expectations of long-term borrowing costs, increased by 9 basis points to 4.076%. This key debt yield has risen almost 20 basis points this week.

Germany's 10-year bund yield rose 9 basis points to 2.19% on Friday, set to conclude the week 16 basis points higher.

In other markets, Japan's Nikkei 225 index rose by 0.3% as exporters benefited from a weaker yen.

USD forecast: ING sees DXY index testing 103.20 on strong jobs report

In the January 5 edition of ING's FX Daily overview, Chris Turner, Global Head of Markets at the Dutch bank, said the U.S. dollar index could test the 103.20 area following a stronger-than-expected jobs report. ING still maintains its scenario of a weaker dollar later this year:

“The start of 2024 FX trading has been characterised by a modest reversal of some of the very benign, pro-risk trends that dominated late last year. At the heart of the story is the consensus view of a US soft landing, where inflation back on target can allow the Federal Reserve to bring rates back to some kind of normal level (e.g. to 3% from 5.25% today) without the economy needing to contract sharply. At its peak in late December, this story had the market pricing around 160bp of Fed easing in 2024, with the first cut priced as early as March. The start of the year has poured a little cold water on that kind of optimism, and our team retains a view that the first cut will come in May. With money markets currently pricing 16bp of easing in March this year, there is still clearly some room for a further back-up in short-term rates. [...]

On the day, we see decent resistance for DXY in the 102.65/75 area above which DXY could push to 103.20 on a strong US jobs report. However, we have a conviction call that the dollar will be lower later this year and we would assume that anywhere above 104 in DXY will meet some good medium-term selling interest”.

At the time of writing on January 5, the DXY dollar index traded at 102.55, up 0.12% on the day after giving up earlier gains which saw it rise to 103.10. The index is currently up 1.2% on a year-to-date basis.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.