FX.co ★ Safe Haven Dollar Jumps More As Jobs Data Seen Vexing Fed's Rate Cut Plans

The U.S. dollar experienced notable appreciation against major world currencies in the week ending October 4, driven by escalating geopolitical tensions in the Middle East and robust U.S. employment data. This surge was fueled by increased safe-haven demand, a significant rise in oil prices, and a stronger-than-expected increase in payroll levels coupled with a lower unemployment rate. As a result, the dollar advanced against the euro, British pound, and Japanese yen during this period.

The dollar also strengthened against the Canadian dollar, Swedish krona, and Swiss franc, as well as the Australian dollar, which are all part of the six-currency Dollar Index. This index climbed 2.1% from September 30 to October 4, rising to 102.52 from 100.38 the week before, marking the most significant gain in over two years. From a weekly low of 100.18 on Monday, the index surged to 102.69 following the robust jobs report.

Friday’s labor data from the U.S. Bureau of Labor Statistics revealed a gain of 254,000 jobs in September, surpassing market expectations of 140,000 and an upwardly revised 159,000 jobs in August. The unemployment rate also fell to 4.1% from the anticipated 4.2%. Additionally, average hourly earnings increased by 0.4% month-on-month versus 0.5% in August, exceeding market forecasts of 0.3%. Year-on-year, earnings rose to 4%, compared to 3.9% in August.

Earlier in the week, data showed a steady Manufacturing PMI, stronger-than-expected job openings, and a higher-than-expected Services PMI. These economic indicators raised concerns about inflationary pressures, particularly from the labor market, potentially impacting the Federal Reserve's plans for further monetary policy easing.

The prospects for substantial rate cuts diminished, as reflected in the CME FedWatch tool, which tracks interest rate expectations. The probability of a 50 basis point rate cut by the Fed in its early November review dropped to 0% on October 4 from 53% a week prior. Expectations for a 25-basis point cut surged to 97% from 47%, with a 3% chance of the Fed pausing in November. This shift in expectations substantially boosted the dollar, marking its strongest week since September 2022.

The EUR/USD pair dropped 1.68% during the week ending October 4, as the dollar's resurgence compounded the euro's weakness following a steeper-than-expected decline in regional inflation. The pair fell to 1.0976 from 1.1163 the previous week, with annual inflation dropping to 1.8% in September, renewing expectations for steady policy easing by the European Central Bank.

Bank of England Governor Andrew Bailey's comments on potential aggressive rate cuts, coupled with dollar strength driven by jobs data, led to a 1.92% decline in sterling against the dollar for the week ending October 4. The GBP/USD pair fell to 1.3116 from 1.3373 a week earlier, with trading sentiment oscillating between a high of 1.3425 and a low of 1.3068.

The Australian dollar also succumbed to the dollar's strength due to a reassessment of the Fed's monetary policy. The AUD/USD pair fell 1.56% from 0.6902 on September 27 to 0.6794 by the week's end, with a high of 0.6943 and a low of 0.6784 recorded throughout the week.

Driven by robust U.S. employment data and a surprising dovish stance by Japan’s new Prime Minister Shigeru Ishiba, the yen recorded its most significant weekly drop since 2009. The USD/JPY pair rose 4.6% over the week, closing at 148.71 from 142.19, ranging between a low of 141.65 and a high of 149.01.

Currency market sentiment remains largely influenced by the rapid adjustment in Fed rate cut expectations and the dollar's unexpected recovery. As market participants anticipate the release of the FOMC minutes on Wednesday and the inflation figures on Thursday, the Dollar Index has slightly receded to 102.45 from Friday’s close of 102.52.In light of the European Central Bank indicating further interest rate reductions, the EUR/USD exchange rate has risen to 1.0978. Meanwhile, the GBP/USD pair has fallen to 1.3084. The AUD/USD pair remains stable at 0.6794, with investors eagerly awaiting the release of the Reserve Bank of Australia's meeting minutes on Monday.

Despite political uncertainties that constrain the Bank of Japan's ability to significantly increase rates, the yen has shown a slight recovery against the US dollar, bringing the USD/JPY pair down to 148.22 from 148.71 at last Friday's close.