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

The U.S. dollar made an emphatic leap against major currencies during the week ended October 4 amidst a dramatic escalation in geopolitical tensions in the Middle East as well as a superb jobs report from the U.S. Safe haven demand for the dollar, a massive surge in the prices of crude oil, as well as data that revealed a more-than-expected addition to payrolls and a lower-than-expected level of unemployment helped the greenback surge against the euro, the British pound and the Japanese yen during the period.

The U.S. dollar also rallied against the Canadian dollar, the Swedish krona and the Swiss franc, the remaining constituents of the 6-currency Dollar Index as well as the Australian dollar.

The Dollar Index jumped 2.1 percent during the week spanning September 30 to October 4, rising to 102.52 from 100.38 a week earlier. The gain was the highest in over two years. From the low of 100.18 recorded on Monday, the index jumped to 102.69 after a stronger-than-expected jobs report.

In data released on Friday morning, the U.S. Bureau of Labor Statistics showed additions of 254 thousand to non-farm payrolls during September versus market expectations of 140 thousand and an upwardly revised addition of 159 thousand in August. The unemployment rate which was seen steady at 4.2 percent unexpectedly edged down to 4.1 percent. The average hourly earnings on a month-on-month basis stood at 0.4 percent versus 0.5 percent in August and market expectations of 0.3 percent. On a year-on-year basis, the hourly earnings which was seen at 3.8 percent recorded 4 percent, compared with 3.9 percent in August.

Data released earlier in the week had revealed a steady Manufacturing PMI, stronger-than-expected job openings data, as well as a higher-than-expected Services PMI level. The strong economic data raised concerns about price pressures emanating particularly from the labor market and the potential impact on the Fed’s plans for further easing in monetary policy.

The reduced likelihood of another massive rate cut to prop up the economy or the labor market was also reflected in the CME FedWatch tool that tracks the expectations of interest rate traders. The probability of a rate cut of 50 basis points by the Fed in the review scheduled for early-November dropped to 0 percent on October 4 from 53 percent a week earlier. Consequently, expectations of a 25-basis points rate cut surged to 97 percent from 47 percent a week earlier. A 3-percent probability was also assigned to a pause by the Fed in November. The change in expectations dramatically changed the outlook on the Dollar, giving it the best week since September 2022.

The EUR/USD pair plunged 1.68 percent during the week ended October 4 as the Dollar’s resurgence compounded the common currency’s weakness following a more-than-expected decline in inflation in the region. The pair slipped to 1.0976 from 1.1163 in the week earlier amidst headline annual inflation falling to 1.8 percent in September, renewing expectations of a steady pace of easing by the European Central Bank. The weekly trading ranged between the high of 1.1209 recorded on Monday and the low of 1.0951 touched on Friday.

Comments by Bank of England Governor Andrew Bailey that hinted at aggressive rate cuts as well as a jobs strength-led rebound in the Dollar caused the sterling to tumble 1.92 percent against the greenback during the week ended October 4. The GBP/USD pair declined to 1.3116 on October 4, from 1.3373 a week earlier. The sterling’s weekly trading range was between $1.3425 recorded on Monday and $1.3068 recorded on Friday.

The Aussie also could not withstand the Dollar’s rebound driven by a reassessment of the Fed’s monetary policy outlook. The AUD/ USD pair shed 1.56 percent during the week spanning September 27 to October 4. From the level of 0.6902 recorded on September 27, the AUD/USD pair dropped to 0.6794 in a week’s time. The pair touched a high of 0.6943 on Monday and a low of 0.6784 on Friday.

The Dollar’s jobs data-led rebound coupled with an unexpectedly dovish stance by Japan’s new Prime Minister Shigeru Ishiba that surprised markets causing the yen to record the biggest weekly percentage drop since early 2009. The USD/ JPY pair rallied 4.6 percent during the week ended October 4 as it closed at 148.71 versus 142.19 a week earlier. The pair ranged between the low of 141.65 on Monday and the high of 149.01 on Friday.

Currency market sentiment remains overwhelmed by the rapid repricing in Fed rate cut expectations and the dollar’s unexpected resurgence. Ahead of the release of the FOMC minutes on Wednesday and the inflation print on Thursday, the Dollar Index has decreased to 102.45 from the level of 102.52 recorded at close on Friday.

Amidst the ECB signaling more rate cuts, the EUR/USD pair has edged up to 1.0978. The GBP/USD pair has also decreased to 1.3084. The AUD/USD pair is flat at 0.6794 amidst anticipation ahead of the releases of the RBA meeting minutes on Monday.

Despite political uncertainty limiting the headroom available to Bank of Japan to raise rates further, the yen has rebounded mildly against the greenback, dragging the USD/JPY pair to 148.22 versus 148.71 at close on Friday.