The US dollar has weakened against all major currencies due to slower wage growth and rising unemployment rates, reducing the appeal of the greenback. The Federal Reserve may keep interest rate hikes modest, making it bumpy for the dollar to hit the target of 2% inflation.
US Labor Data Shows Slower Wage Growth
The US dollar has weakened against all major currencies after US labor data for February showed slower wage growth. This suggests that an easing of inflation pressures may keep the Federal Reserve’s pace of interest rate hikes modest and reduce the greenback’s appeal. The US economy added jobs at a brisk clip in February, but slower wage growth and a rise in unemployment rates prompted financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers meet in two weeks.
Federal Reserve’s Pace of Interest Rate Hikes Modest
Congressional testimony earlier in the week by Fed Chairman Jerome Powell was seen as hawkish and strengthened the dollar as Treasuries pay more in yield than other government debt. However, the dollar index, a basket of trading currencies, fell 0.618% as the market got ahead of itself on the prospect of a 50 basis-point hike at the next Fed meeting. The futures for fed funds slid to a 41% chance of a 50 bps hike when Fed policymakers meet on March 22, compared with a 71.6% probability a week ago, according to CME’s FedWatch Tool.
Slowing Inflation to the Fed’s Target of 2%
The dollar may be range-bound as slowing inflation to the Fed’s target of 2% is likely to be bumpy. Joe Manimbo, senior market analyst at Convera in Washington, said, “When the market revises up expectations for peak rates, we see the dollar take two steps up. But once the dust settles, we see the dollar take a step back.” The market already anticipates that the Fed is going to pause this year, but exactly when it’s just unknown.
Consumer Price Index Scheduled for Release
The “quite important” consumer price index (CPI) scheduled for release on March 14 is now front and center, said Andrzej Skiba, head of the BlueBay U.S. fixed income team at RBC Global Asset Management in New York. “The focus now moves on to the CPI print and the overall financial conditions given what’s happening in the banking space in the US,” he said.
Impact on Global Currencies
The euro rose 0.57% to $1.064, and Sterling traded at $1.2024, up 0.83% on the day. The Japanese yen strengthened 1.01% to 134.79 per dollar. The dollar earlier jumped against the yen in a knee-jerk move after the Bank of Japan kept policy unchanged in Governor Haruhiko Kuroda’s last policy meeting before he steps down in April.
In conclusion, the US dollar has weakened against all major currencies due to slower wage growth and rising unemployment rates. This has reduced the appeal of the greenback, and the Federal Reserve may keep interest rate hikes modest, making it bumpy for the dollar to hit the target of 2% inflation. The focus now moves on to the CPI print and the overall financial conditions given what’s happening in the banking space in the US.