The dollar jumped Friday, underpinned by move higher in U.S. Treasury yields after a better-than-expected monthly jobs report stoked expectations the Federal Reserve will begin to tighten policy sooner rather than later.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.59% to 91.69, as U.S. bond yields gained, with the 10-yield rate trending close to 1.3%.
“[W]e continue to see the risks skewed towards earlier Federal Reserve stimulus withdrawal with a QE tapering announcement before year end and the first interest rate hikes coming next year,” ING said in a note following a better-than-expected U.S. jobs report released Friday.
The U.S. economy created 943,000 jobs in July, above forecasts for a gain of 870,000, while the unemployment rate fell to 5.4% from 5.9%.
Average hourly earnings rose to 4% to from 3.7% as employers were forced to hike wages to attract new workers amid dearth in labor supply. The trend of rising wages is expected to continue, and could keep inflation higher for longer.
If the Fed fails to act quell inflation, then it runs the risk of policy misstep.
“The recovery in employment is getting to a place where the Fed needs to seriously consider tapering its asset purchases to avoid an unnecessary overshoot on inflation,” The economy has become more resilient through outbreaks. That ups the risk of a misstep and the need for the Fed to extinguish unwanted inflation, something it has not had to do in decades.
The dollar has been raking up gains after bottoming in May, but there are some signs that investors are pausing their bullish bets on the greenback.
Speculators’ net long positions on the dollar were cut in the latest week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday.
The value of the net long dollar position was $2.11 billion for the week ended Aug. 3, compared with a net long bets of $2.99 billion for the prior week.