Dollar Jumps With T-Note Yields on Strong U.S. Job Growth

The dollar index (DXY00) on Friday rallied to a 7-week high and finished up by +0.82%.  The dollar on Friday morning recovered from a 1-week low and jumped to a 7-week high as bond yields surged on the stronger-than-expected U.S. Jan payroll report. The report shows strength in the labor market that is hawkish for Fed policy and pushed back expectations for Fed rate cuts.  The dollar extended its gains after the University of Michigan’s U.S. Jan consumer sentiment index was revised upward to a 2-1/2 year high. 

Friday’s U.S. economic news was better than expected and bullish for the dollar.  Jan nonfarm payrolls jumped +353,000, stronger than expectations of +185,000 and the biggest increase in a year.  Also, the Jan unemployment rate was unchanged at 3.7%, showing a stronger labor market than expectations of an increase to 3.8%.  In addition, Jan average hourly earnings rose +0.6% m/m and +4.5% y/y, stronger than expectations of +0.3% m/m and +4.1% y/y. Finally, the University of Michigan U.S. Jan consumer sentiment index was revised upward by +0.2 to a 2-1/2 year high of 79.0, stronger than expectations of 78.9.

The markets are discounting the chances for a -25 bp rate cut at 22% for the March 19-20 FOMC meeting and a 89% chance for that same -25 bp rate cut at the following meeting on April 30-May 1.

EUR/USD (^EURUSD) on Friday fell by -0.73%.  The euro on Friday fell back from a 1-week high and dropped to a 7-week low after the stronger-than-expected U.S. Jan payroll report pushed the dollar higher.  The euro today initially moved high on a stronger-than-expected manufacturing production report from France. 

France Dec manufacturing production rose +1.2% m/m, stronger than expectations of +0.2% m/m and the biggest increase in 7 months.

Swaps are pricing in the chances for a -25 bp rate cut by the ECB at 13% for its next meeting on March 7 and 75% for that same rate cut at the following meeting on April 11.

USD/JPY (^USDJPY) on Friday rose by +1.29%.  The yen on Friday fell to a 1-1/2 week low against the dollar as T-note yields surged on the stronger-than-expected U.S. Jan payrolls report.  Weakness in Japanese government bond yields also weighed on the yen after the 10-year JGB bond yield Friday fell to a 1-1/2 week low of 0.665%. 

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 20% for its next meeting on March 19 and at 75% for the following meeting on April 26.

April gold (GCJ4) Friday closed -17.40 (-0.84%), and Mar silver (SIH24) closed -0.440 (-1.89%).  Precious metals on Friday retreated, with silver falling to a 1-week low.  Friday’s stronger-than-expected U.S. Jan payroll report pushed the dollar up to a 7-week high, undercutting metals prices.  Also, higher global bond yields on Friday weighed on precious metals.  Friday’s U.S. payroll report shows strength in the labor market that has pushed back expectations for Fed rate cuts, a bearish factor for precious metals.  Friday’s rally in the S&P 500 to a record high curbed safe-haven demand for precious metals.  Gold is also weighed down from ongoing long liquidation of gold by funds after long gold holdings in ETFs fell to a 4-year low Thursday. 

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