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Dollar Hits 4-Month High Against Euro as Jobs Data Triggers Fed Tapering Bets

The dollar climbed against major currency pairs on Monday, briefly hitting a four-month high versus the euro.

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The dollar climbed against major currency pairs on Monday, briefly hitting a four-month high versus the euro, as investors encouraged by last week's strong jobs report brought forward bets for an earlier tapering of Federal Reserve stimulus.

The greenback strengthened as much as $1.1742 against the euro, extending a 0.6 percent pop from Friday, when the Labor Department's jobs report stoked bets that the Fed could start trimming asset purchases this year and raise rates as soon as early 2023.

The dollar also climbed as high as 110.37 Japanese yen, after a 0.4 percent rally at the end of last week, while the dollar index (DXY), which tracks the U.S. currency against six rivals, ticked down slightly but remained close to four-month highs.

"U.S. payrolls were a game-changer," Chris Weston, head of research at brokerage Pepperstone in Melbourne, Australia, wrote in an Aug. 9 note to clients.

In July, America's private employers added 943,000 jobs—a proxy for new hires—in a sign that the U.S. economy enjoyed a solid burst of job growth.

"They were hot," Weston said in the note, referring to the Labor Department's so-called nonfarm payrolls report, which, besides the headline print of 943,000 jobs, also recorded a 4 percent rise in wage pressures, an improved labor participation rate, and a drop in the unemployment rate.

"This is progress, and the U.S. economy no longer requires the level of support it once did," Weston wrote, adding that Monday's market data had reinforced market expectations for an earlier pullback than previously anticipated of the Fed's crisis support measures for the economy.

"Somewhat hawkish speeches from Fed Board of Governors Waller and Clarida last week have been validated," Weston wrote.

Federal Reserve Vice Chair Richard Clarida, the Fed's second-in-command, said in a webcast discussion hosted by the Peterson Institute for International Economics that the economic conditions for raising interest rates could be met by the end of 2022, paving the way for a liftoff of the Fed's benchmark rate from its current level of near zero.

Clarida said that the central bank estimates that the U.S. economy will grow faster than the projected long-run trend growth through 2023, with robust growth in gross domestic product (GDP) driving down the unemployment rate to 3.8 percent by the end of 2022.

"My expectation today is that the labor market by the end of 2022 will have reached my assessment of maximum employment," Clarida said, adding that if inflation expectations remain "well anchored" at the Fed's 2 percent longer-run goal, "commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework."

Fed officials have made a jobs market recovery a condition of tighter monetary policy, even though it appears clear that the benchmark for raising rate has been met on the inflation front, where a surge in post-pandemic spending and bottlenecks in supply chains have helped push the rate of price increases to well above the Fed's goal of around 2 percent.

The core personal consumption expenditures (PCE) price index, which excludes the volatile categories of food and energy and is the Fed's preferred inflation gauge, rose 3.5 percent in the 12 months to June, the Commerce Department said on July 30. The last time the core PCE inflation gauge saw a similar year-over-year vault was in July 1991.

Weston predicted that if the next core consumer price index (CPI), an alternative measure of inflation that, like the core PCE, excludes food and energy, comes in hotter than economists predict, then there will be more buying pressure on the greenback, driven largely by nominal and real rates moving higher.

"The debate on the duration of "transitory' inflation is still one the macro community debates fiercely," he added.

Some economists have expressed concerns that if prices rise too fast and stay high for too long, expectations of further price increases could take hold, driving up demand for wages and potentially triggering the kind of wage-price spiral that plagued the economy in the 1970s.

Fed officials, as well as key members of the Biden administration, have insisted inflation is transitory and upwards price pressures will abate once pandemic-related supply chain dislocations moderate.

Reuters contributed to this report.

By Tom Ozimek

Tom has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he's ever heard is from Roy Peter Clark: 'hit your target' and 'leave the best for last.'

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