Dollar's fate hangs on whether jobs gains outweigh China for Fed

New York

FOR dollar bulls, policymakers in China navigating currency and stock market turmoil may compete with US economic performance for attention from the Federal Reserve.

The greenback fell versus traditional haven currencies, posting its worst weekly loss versus the yen since August 2013, as China's moves to manage the yuan precipitated a stock rout and fuelled risk aversion around the world. The dollar, meanwhile, rallied versus commodity-exporting and emerging-market peers as a better-than-forecast US jobs report showed domestic economic strength, in contrast with slowing growth elsewhere.

That has investors seeking to discern the Fed's priorities when it considers more rate increases. Last year, strength in the dollar and volatility in emerging markets were among the reasons that encouraged the central bank to stand pat. Richmond Fed president Jeffrey Lacker said on Jan 7 that the economy is strong enough to merit additional rate increases, "barring subsequent shocks". "It's likely to continue to result in a mixed market for the dollar," said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc in Washington. "If volatility is sustained over a period of time, it's likely to decrease the odds of further Fed rate hikes, at least at the pace that the market's pricing in, and that's obviously negative for the dollar." The dollar slumped 2.7 per cent against Japan's currency from a week earlier, closing the week at 117.26 yen, reaching the weakest level since January.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, added 0.6 per cent on the week. The gauge rose 9 per cent last year and 11 per cent in 2014.

Chinese stocks suffered their worst week since August amid eight straight cuts to the yuan's reference rate, the fixing around which the currency is allowed to trade. Global currency volatility jumped in response, climbing the most during the week since September, according to a JPMorgan Chase & Co index.

A labour-market report on Friday from the US provided a bright spot for dollar bulls. The 292,000 jobs gain in December exceeded the highest forecast in a Bloomberg survey and followed a 252,000 increase in November that was stronger than previously estimated. "This means that the Fed continues to be on track for rate increases," said Georgette Boele, a currency strategist at ABN Amro Bank in Amsterdam. That's "good for the US dollar." Bloomberg's gauge of the dollar climbed to its highest in more than a decade after the release before paring gains. Treasuries two-year notes yield 0.90 percentage point more than that of similar maturity bonds of Group of Seven nations, almost the highest level since 2007, bolstering the allure of dollar-denominated securities. BLOOMBERG