Dollar Rallies on Strong U.S. Labor Market Reports

The dollar index (DXY00) on Thursday rose by +0.78% and posted a 4-week high. The dollar jumped Thursday after the U.S. labor market showed unexpected strength, which was hawkish for Fed policy and bullish for the dollar.  Also, hawkish Fed comments Thursday from Kansas City Fed President George and Atlanta Fed President Bostic gave the dollar a boost as they both signaled higher interest rates.

Thursday’s U.S. economic news was bullish for the dollar.  The Dec ADP employment change rose +235,000, showing a stronger labor market than expectations of +150,000.  Also, weekly initial unemployment claims unexpectedly fell -19,000 to a 3-1/4 month low of 204,000, showing a stronger labor market than expectations of no change at 225,000. In addition, the Nov trade deficit shrank to a 2-year low of -$61.5 billion from -$77.8 billion in Oct, a smaller deficit than expectations of -$63.0 billion.

Fed comments Thursday were mostly on the hawkish side and bullish for the dollar.  Kansas City Fed President George said she "raised her forecast to over 5%" on her projection for the fed funds rate and said she sees it "staying there for some time until we get signals that inflation is really convincingly starting to fall back toward our 2% goal." Also, Atlanta Fed President Bostic said inflation is still way too high in the U.S., and the Fed has "much work to do on inflation" despite signs that prices are moderating.

On the bearish side for the dollar were dovish comments from St. Louis Fed President Bullard that signal he thinks the Fed had almost raised interest rates high enough to bring down inflation when he said, "the policy rate is not yet in a zone that may be considered sufficiently restrictive, but it is getting closer."

EUR/USD (^EURUSD) on Thursday fell by -0.74% and posted a 3-week low.  A jump in the dollar Thursday weighed on the euro.  Also, Thursday’s Eurozone economic news was weaker than expected, which was dovish for ECB policy and bearish for EUR/USD.  Eurozone Nov producer prices rose less than expected, and German Nov trade data was weaker than expected.

Eurozone Nov PPI rose +27.1% y/y, weaker than expectations of +27.5% y/y and the slowest pace of increase in 11 months.

German Nov exports unexpectedly fell -0.3% m/m, weaker than expectations of no change.  German Nov imports fell -3.3% m/m, weaker than expectations of -0.9% m/m.

USD/JPY (^USDJPY) on Thursday rose by +0.50%.   The yen on Thursday fell to a 1-week low against the dollar as higher T-note yields undercut the yen.  The yen also had carry-over pressure from Wednesday when the BOJ boosted QE and conducted unscheduled bond-buying for the fourth day.

Thursday’s Japanese economic news was supportive for the yen after the Japan Dec consumer confidence index unexpectedly rose +1.7 to 30.3, stronger than expectations of a decline to 28.3.

February gold (GCG3) on Thursday closed down -18.40 (-0.99%), and March silver (SIH23) closed down -0.540 (-2.25%).  Precious metals Thursday posted moderate losses, with silver falling to a 2-week low. A rally in the dollar index Thursday to a 4-week high was bearish for metals prices.  Also, higher global government bond yields Thursday are negative for gold prices.  In addition, hawkish comments Thursday from Kansas City Fed President George and Atlanta Fed President Bostic undercut metals prices after they both signaled higher interest rates.

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