US Jobs Data Fuels Dollar Rally

The US dollar climbed to a two-year high against the euro and an eight-month high against the pound, driven by strong US jobs data that bolstered investor confidence in the American economy. Thursday’s report revealed that new unemployment benefit claims fell to an eight-month low, signalling robust economic growth.

• The pound dropped by 1.3% to $1.2354, marking its lowest point since late April.
• The euro fell 0.9% to $1.0267, the lowest since November 2022.
• The US dollar index, which tracks the currency against a basket of six peers, rose 1.1% for the week—its best performance in over a month.

Interest Rate Expectations Support Dollar Strength

Markets increasingly believe that persistent US economic resilience and inflationary pressures will slow the Federal Reserve’s pace of interest rate cuts. Current projections suggest the Fed may lower rates by 0.43 percentage points by the end of 2025. In contrast, the Bank of England and the European Central Bank are expected to cut rates by 0.59 and 1.08 percentage points, respectively, over the same period. This divergence in monetary policy outlook has further boosted the appeal of the dollar.

Sterling and Euro Face Headwinds

Both sterling and the euro suffered under pressure from weak economic data and the threat of rising energy costs:

• Weak Economic Indicators: Poor UK and Eurozone manufacturing data released on Thursday morning added to the currencies’ woes.
• Energy Concerns: European gas prices are under strain after Russian supplies through Ukraine ceased due to an expired deal. This forced Europe to rely on expensive liquefied natural gas imports, as winter demand surged.

Investor Sentiment and Currency Trends

Currency strategist Kit Juckes from Société Générale noted that sterling’s decline was amplified by investors trimming their long positions amid the dollar rally. Additionally, thin trading conditions during the holiday period heightened volatility. Analysts also linked the energy crisis to potential negative impacts on trade terms for major energy-importing regions like the UK and the Eurozone.

Broader Market Impact

US stock markets reflected mixed sentiment as indices retreated after early gains:

• The S&P 500 and Nasdaq Composite closed 0.2% lower.

Meanwhile, the outlook for the industrial sectors in the UK and the Eurozone remains challenging. Higher energy costs could maintain downward pressure on growth without significantly altering inflation or rate expectations, according to experts.

Conclusion

The dollar’s surge highlights the ongoing confidence in the US economy amidst global uncertainties. Diverging economic trajectories, weak manufacturing data, and energy challenges weigh heavily on sterling and the euro, intensifying their struggle against the greenback. Looking ahead, the interplay between monetary policies and energy markets will likely shape currency trends in 2025.

Source: (FT.com)