The dollar dipped on Wednesday after a stronger-than-expected report on the labor market and ahead of minutes from the Federal Reserve’s December meeting, as investors seek signs on when the central bank will begin to hike interest rates.
Private payrolls jumped by 807,000 jobs in December, according to the ADP National Employment Report, well above the expectation for 400,000 jobs, although climbing COVID-19 cases could slow momentum in the labor market.
The dollar had risen more than 2% since the end of October before Wednesday’s decline, as expectations have grown the Fed will begin to hike interest rates this year. Expectations for at least a 25 basis point hike by the central bank are over 60%, according to the CME FedWatch Tool.
“In a broadbrush point of view, FX, much like equities has seen safe havens really richen up. This is part and parcel of the shift we are seeing out of the Fed in terms of a new pivot on policy and perhaps also uncertainty around growth which could be in relation to putting the brakes on the economy and COVID,” said Colin Stewart, head of Americas at Quant Insight in New York.
“In both asset classes a lot of potential weakness and uncertainty is priced in, we are seeing bullish signals on emerging market FX versus developed market names, we are seeing bullish signals on growth currencies against safe havens.”
But the strengthening in the greenback may have sparked some caution on Wednesday ahead of the release of the minutes, scheduled for release at 2 p.m. ET (1900 GMT), which could provide insight into how aggressive the central bank may be in hiking rates. Analysts also pointed to the 96.40 mark as a technical level which is acting as resistance.
The dollar index fell 0.368%, with the euro up 0.43% to $1.1333.
On Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari he expected the U.S. central bank to need to raise interest rates twice this year to address persistently high inflation, reversing his long-held view that rates would need to stay at zero until at least 2024.
Despite the rapid spread of the Omicron variant, investors have viewed it as unlikely to derail the global economy or more aggressive actions by central banks, with studies indicating lower hospitalization rates.
The Japanese yen strengthened 0.31% versus the greenback at 115.79 per dollar, while Sterling was last trading at $1.3564, up 0.24% on the day.
Sterling hit a fresh 2-month high versus the greenback at 1.3566 per dollar, its highest since Nov. 9, on growing expectations the Bank of England will raise interest rates as soon as next month.
(Reporting by Chuck Mikolajczak; editing by Barbara Lewis)
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