Dollar strengthens in Asian trading on robust U.S. jobs report and higher interest rate expectations

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5th June 2023 – (New York) The U.S. dollar firmed against major currencies in Asian trading on Monday following a robust U.S. jobs report that spurred traders to price in higher interest rates for longer.

The Australian dollar erased early losses after a report showed a pickup in services activity in China, its key trading partner. The yuan also received a boost, reversing an earlier decline.

Meanwhile, the Canadian dollar remained resilient, buoyed by a spike in crude oil prices after Saudi Arabia announced its largest production cut in years.

The U.S. dollar gained support from higher Treasury yields as data released on Friday showed payrolls in the public and private sectors increased by 339,000 in May, surpassing the 190,000 forecast on average by economists polled by Reuters.

The U.S. currency rose 0.11% to 140.135 yen, while 10-year U.S. Treasury yields climbed more than 3 basis points to 3.727% in Tokyo. The dollar had rallied 0.84% against the yen on Friday.

On the other hand, the euro slipped 0.04% to $1.0702, extending the previous session’s 0.51% slide.

While the headline U.S. jobs growth was much stronger than expected in May, wage pressures eased, and the unemployment rate climbed off a 53-year low. This potentially provides the Federal Reserve with an opportunity to pause their rate-hiking campaign at the upcoming meeting on June 13-14, as some officials had voiced a preference for doing last week.

However, these bets have now shifted to July, and traders have eased off on bets for rate cuts later in the year.

According to CME Group‘s FedWatch tool, interest rate traders are laying 1-in-4 odds for a hike next week, down from 2-in-3 odds a week earlier. For July, markets put 70% odds for rates to be at least a quarter point above where they are currently.

Bart Wakabayashi, a branch manager at State Street in Tokyo, said, “It’s very data-driven, and given that wages are moderating, it would point to a potential pause – but I don’t believe they’re done. The dollar overall is going to remain well supported.”

Wakabayashi expects the dollar to push up to 142.50 yen, and a clear break of that would open the way to 145.

The Australian dollar remained flat at $0.6605, recovering from early losses of as much as 0.25%, aided by more evidence of China’s recovery from the pandemic. The private-sector Caixin/S&P Global Services Purchasing Managers’ Index (PMI) rose to 57.1 in May from 56.4 in April, contrasting with the official PMI released last week that showed a slower pace of expansion.

The yuan edged up, reversing an earlier decline. The U.S. dollar was 0.03% lower at 7.1074 yuan in offshore trading, after earlier gaining 0.15%. It reached a six-month high at 7.1404 on Thursday.

The Canadian dollar remained firm, amid a more than 1% rise in crude prices after Saudi Arabia announced its biggest production cut in years. The greenback slipped 0.06% to C$1.34265, approaching Friday’s two-week low of C$1.3408.