The US Nonfarm Payroll data has just been released, showing that 180,000 jobs have been added in the last month. This data, in combination with yesterday’s announcement that jobless claims were holding steady at the lowest point since 2008, has raised expectations that the Fed will begin tapering its QE programme later this month. This is broadly in line with market expectations, and in the hours before the announcement, the dollar continued its upwards trajectory, hovering around a seven-week high against the euro. There was, however a marked sell-off in the hour before the announcement, with traders locking in gains ahead of the data release.
Across the pond, the euro has been struggling against the dollar, the yen, and the pound after the head of the ECB said that the bank was preparing to cut interest rates and inject more capital into the banking sector in order to encourage low market rates.
Two-year US Treasury yields, which enjoy a strong correlation with the US dollar index, hit 0.5217%, their highest point since May 2011, widening the gap over similar German bonds to its highest point since July. rose to its highest since May 2011, at 0.5217 percent, and the gap over similar dated German bonds widened to its highest since late July. The dollar index has a good correlation with the two-year U.S. yield.
The dollar has also been boosted by rises in other US yields, with the 10-year benchmark yield hitting 3% on Thursday, the highest point in over two years.
“A strong U.S. jobs report, say 200,000 or more, in our view will drive U.S. yields higher and support the dollar,” said Credit Suisse currency analysts Bernd Berg, talking to Reuters “While it will head higher against the euro, we think the impact will be felt more in the dollar/yen.”
While the figure of 180,000 fell somewhat short of Berg’s definition of ‘strong’, it is definitely a positive from the point of view of the US economy, and seems to fit the Fed’s criteria for the signs of recovery that they are looking for before tapering.
It won’t just be currency traders that will be keeping a keen eye on the Fed’s tapering plans. Emerging markets, such as the BRICS countries, have seen huge economic benefits from the availablity of cheap US dollars since 2009. There is now much discussion among these nations about how they are going to cope when the taps are turned off, with the BRICS countries looking to set up a fighting fund to keep the dollar low. Further dollar gains could cause trouble for currencies with a lot of exposure to the USD, such as the Turkish lira and the Indian rupee.