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The US Dollar Index (DXY) has risen, supported by the latest employment report, which reinforces the Federal Reserve’s decision to keep interest rates steady in January.
Higher yields on US Treasury bonds are also providing support for the US Dollar. In December, US Nonfarm Payrolls increased by 256K, surpassing the expected 160K and November’s 212K.
The Role of Treasury Yields and Jobs Data in Strengthening the US Dollar
The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, reached 109.98 during Asian hours on Monday, marking the highest level since November 2022. This increase comes as a result of strong data from the US labor market in December.
The rise in nonfarm payrolls exceeding expectations indicates that the US economy continues to perform strongly, and the labor market remains tight. This is likely to reinforce the Federal Reserve’s decision to keep rates steady in January, with investors contemplating the possibility of delaying further rate hikes for a longer period.
Additionally, robust job data is interpreted as a signal of ongoing inflationary pressures and sustained economic strength in the US, which boosts demand for the Dollar and results in a strong Dollar performance in the forex markets.
Moreover, the strong US employment data released on Friday led to an increase in US Treasury bond yields. As of the time of writing, the 2-year and 10-year US Treasury bond yields stood at 4.38% and 4.76%, respectively. Higher yields provide further support for the US Dollar.
Impact of US Jobs Data and Fed’s Rate Policy
According to the data released by the US Bureau of Labor Statistics (BLS) on Friday, Nonfarm Payrolls (NFP) increased by 256K in December, significantly exceeding the market expectation of 160K and surpassing the revised November figure of 212K (previously reported as 227K).
Additionally, the US Unemployment Rate dropped to 4.1% in December from 4.2% in November. However, annual wage inflation, measured by Average Hourly Earnings, slightly dipped to 3.9% from the previous 4%.
The latest FOMC (Federal Open Market Committee) Meeting Minutes indicated that policymakers agree that the process may take longer than initially expected due to recent higher-than-expected inflation readings and the potential effects of changes in trade and immigration policy under the incoming Trump administration.
In an interview with the Wall Street Journal, St. Louis Federal Reserve President Alberto Musalem suggested that greater caution is needed in reducing interest rates.
Musalem stated that the risk of inflation being stuck between 2.5% and 3% had increased by the time of last month’s meeting, according to Reuters.
Federal Reserve Board member Michelle Bowman also joined the chorus of Fed speakers last week, emphasizing that policymakers are adopting a more cautious approach as they work to smooth market reactions to a faster pace of rate cuts in 2025 than many market participants had previously expected.
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