Dollar closes choppy day flat on mixed economic signals
20:56, 3 December 2021
The US dollar currency index appeared to rise on expectations that the Federal Reserve could accelerate its timeline for tapering and rate increases, but by late afternoon had reversed those gains.
The dollar index rose as much as 0.30% on Friday to highs of 96.45 on its way to matching 52-week highs of 96.94 achieved just last week. But sentiment reversed midday as the dollar index traded roughly flat to the prior day’s close at around 96.15.
The dollar index is sensitive to moves in sentiment for Federal Reserve rate hikes as the dollar has historically increased in value ahead of Fed rate increases and is already up by around 7% year to date.
While comments from the Federal Reserve this week indicated rate increases are right around the corner, lackluster jobs numbers and rising Covid-19 concerns due to the Omicron variant kept the dollar from realising the gains.
Jobs report disappoints
The dollar was expected to decline following a lackluster jobs report on Friday in a sign that the economy wasn’t growing fast enough for the Fed to accelerate their timeline.
Total nonfarm payroll employment increased by just 210,000 in November, which is the slowest increase since December of last year and well below expectations of 550,000–700,000 jobs.
“This morning's employment report left more to be desired on the ‘maximum employment’ side of the FOMC's dual mandate and may deter the Fed from moving too quickly on its taper timeline,” Wells Fargo economists wrote in a report provided to Capital.com. “Although the previous two months were revised up by 82,000, this miss means that with just one final employment report left in 2021, nonfarm payrolls are still roughly 4 million jobs below their pre-pandemic level.”
Remaining optimistic on the economy
Markets initially appeared to look past the headline numbers of the jobs report.
The unemployment rate did fall to a 21-month low of 4.2%, down from 4.6% the previous month.
Wells Fargo analysts said the unemployment rate fell for “the right reasons,” which include a 542,000 drop in the number of unemployed people while the civilian labour force rose almost 600,000 and the participation rate increased to 61.8%.
Additionally, investors latched on to comments from St. Louis Federal Reserve Bank president James Bullard, who in a speech on Friday said the Federal Open Markets Committee (FOMC) would consider increasing the pace at which it winds down the Fed’s purchases of Treasuries and mortgage securities.
Bullard said he would consider increasing the pace of the Fed’s current taper plan such that asset purchases would wind down to zero in the spring as opposed to the current trajectory of June. He would even consider hiking rates before tapering is complete if the economy is running hot enough.
Federal Reserve chair Jerome Powell made similar statements before Congress earlier in the week leading Bank of America to revise its estimates to say the Fed will end its asset purchase program in March but still raise rates in June.
However, it was not enough to overcome lingering headwinds in the economy, including the spread of the Omicron variant, Bank of America analysts said in a report sent to Capital.com
“While it's encouraging to see positive flows into the labour force, there are also headwinds that could keep workers on the sidelines,” the analysts said. “There has been some labor supply relief but rising Covid-19 cases and the vaccine mandate could be headwinds for further improvement.”