US dollar rally intact as jobs report seen as no roadblock for Fed

[TORONTO] The US dollar posted a weekly gain as below-forecast September jobs growth failed to temper the outlook for a Federal Reserve interest-rate increase by the end of the year.

The greenback weakened from a two-month high Friday after the Labor Department said the US added 156,000 jobs, compared with a median forecast of 172,000 in a Bloomberg survey of economists, while the August jobs gain was revised higher.

Futures indicate a 65 per cent chance of central-bank policy tightening by its December meeting, up from 64 per cent Thursday.

"This report tells the Fed that jobs growth remains solid supporting a December hike, but the rise in the labour-force-participation rate and range-bound wages suggests they will hike very slowly," said Ian Gordon, a foreign-exchange strategist at Bank of America Corp in New York. "It will support expectations for a December hike so the US dollar declines will be limited despite the initial headline disappointment."

The US currency has gained about 3 per cent from its 2016 low reached in May on signals of faster economic growth and inflation. US dollar bulls upended by rate-path revisions from the Fed are hanging onto the central bank's decree that it remains data dependent, and that every policy meeting is "live" for a rate increase.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, gained 1 per cent this week as of 5pm in New York. On Friday, it fell 0.2 per cent after climbing as much as 0.5 per cent to the strongest level since July 27. The greenback has advanced 0.3 per cent this week to US$1.1201 per euro and gained 1.6 per cent to 102.98 yen.

The premium investors demand to hold two-year Treasuries over similar-maturity bonds from six other major economies was close to the highest this year, bolstering the relative allure of the US currency.

Fed policy makers have raised interest rates only once since the financial crisis amid tepid global growth. The jobs report supports the outlook for the central bank to take a gradual path to raising rates.

Following the employment report, traders saw about a 17 per cent probability of a rate increase when the Fed issues its next policy statement Nov 2, less than a week before the US presidential election. The calculation is based on the assumption the effective Fed funds rate will trade at the middle of the new range after the central bank's next increase.

"The market was probably leaning towards a strong report given the stronger data tone and hawkish Fedspeak," said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank.

"This leaves a bit more time for the US dollar to consolidate so we see a bit more downside over the coming days."

BLOOMBERG