Dollar's ride on jobs data loses steam, but rebound nears ahead of Fed hikes

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By Yasin Ebrahim

AiVIF.com – The dollar’s joyride on the back of the strong November jobs report Friday ran out of steam, but the bears aren’t likely to squeeze the greenback for much longer as the Fed readies further rate hikes, albeit at a slower pace.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.04% to 104.65, easing from its session high of $105.56.

“We believe that the recent pullback in the dollar is overdone and unlikely to have much follow-through from here,” Wells Fargo said in a note earlier this week.

Further rate hikes will prop up demand for the greenback even at a slower pace “as the underlying fundamentals and interest-rate differentials continue to favor the U.S. currency,” it added.

The bets on further fed hikes were boosted on Friday as the monthly jobs report showed an upside surprise in job gains and wages, the latter of which will be more worrying for the Fed in its fight against inflation.

Earlier this week, Powell outlined the importance of reducing demand in the labor market, particularly in the services sector.

"Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category," Powell said in a speech on Wednesday at the Brookings Institution event in Washington.

With the dollar nursing a more than 7% loss since early November, others have suggested that it’s too early for the long wave goodbye on the dollar’s bull run and question the market’s bet that Powell isn’t likely to keep rates higher for longer.

Investors' move to call Powell’s higher-for-longer “bluff” is premature, and "may not be sustainable if the Fed increases the volume of its rate protest by sounding more stubbornly hawkish and the next inflation readings argue against a rapid descent in inflation," ING said, adding that economic troubles in Europe play into the dollar's favor.  

"Incidentally, the global macro picture remains challenging – especially in Europe (where colder weather may push gas prices higher) and China – which also points to dollar resilience," ING added.