Dollar Surges on Robust US Jobs Data, Reinforcing Fed’s Hawkish Stance
The US dollar experienced a broad-based rally on Friday, January 10, 2025, fueled by unexpectedly strong jobs data for December. The surge reinforced market expectations that the Federal Reserve will maintain its current interest rate levels at its upcoming policy meeting later in the month, potentially signaling a pause in the rate-cutting cycle initiated in the previous year. The robust employment figures underscore the resilience of the American economy, contrasting with the more subdued economic landscape in other major economies. This divergence further cements the dollar’s appeal as a safe-haven asset and bolsters the case for a sustained period of higher interest rates in the US.
The greenback climbed to its highest level against the Japanese yen since July, reaching 158.27 yen, marking a 0.1% increase. This continues a trend of dollar strength against the yen, having appreciated in five out of the last six weeks. The euro, conversely, weakened against the dollar, dropping to its lowest point since November 2022. The single European currency dipped 0.6% to $1.024, extending its decline for a second consecutive week. The weakening euro reflects the growing divergence in monetary policy between the US and the Eurozone, with the European Central Bank grappling with a more fragile economic recovery. Furthermore, a recent Reuters poll revealed a significant number of foreign exchange forecasters anticipating euro-dollar parity by 2025, highlighting the potential for further euro depreciation.
The December jobs report, released by the US Labor Department, revealed a surge in nonfarm payrolls, with the economy adding 256,000 jobs, significantly exceeding economists’ projections of 160,000. This impressive figure follows a downward revision of the November jobs number to 212,000, indicating continued but slightly moderated job growth. The unemployment rate also edged down to 4.1%, bettering expectations of 4.2%. While average hourly earnings rose by a more modest 0.3% in December, following a 0.4% increase in November, the annual wage growth remains at a healthy 3.9%, down slightly from 4.0% in November. This combination of robust job creation and moderate wage growth paints a picture of a healthy labor market, reducing immediate inflationary pressures while supporting continued economic expansion.
The strong jobs report further solidifies the market’s view that the Fed will hold interest rates steady at its January meeting. According to LSEG estimates, the US rate futures market has fully priced in a pause in the Fed’s easing cycle, reflecting a shift in sentiment compared to previous expectations of more aggressive rate cuts. The market also anticipates minimal easing in 2025, pricing in only 31 basis points of cuts, equivalent to roughly one rate reduction. This suggests the first rate move is likely to occur around June, later than previously anticipated. Market participants are closely watching economic data and Fed communications for further clues about the future trajectory of monetary policy.
The impact of the US jobs data resonated across the currency markets. The British pound weakened against the dollar, falling to its lowest level since November 2023 and trading at $1.2247, a 0.5% decline. The pound’s weakness was compounded by a selloff in UK government bonds (gilts) and lingering concerns about the state of British public finances. These factors contributed to a broader risk-off sentiment, boosting the dollar’s appeal as a safe haven. In Japan, the focus shifted towards rising inflationary pressures, fueled by potential wage increases and the impact of a weaker yen on import costs. Sources indicate the Bank of Japan is paying close attention to these dynamics and may revise its inflation forecast upwards this month.
The US Dollar Index, which measures the greenback’s performance against a basket of major currencies, reached its highest level since November 2022, continuing its impressive run with a sixth consecutive weekly gain. This marks the index’s longest winning streak since an 11-week surge in 2023. The index closed at 109.48, a 0.2% increase, reflecting the dollar’s broad strength. The diverging economic landscapes and monetary policy trajectories across major economies are expected to continue shaping currency markets in the coming months, with the dollar likely to remain a dominant force.
