Dollar index jumps after US payrolls beat forecasts

By Chuck Mikolajczak

NEW YORK, Nov 6 (Reuters) - The US dollar index jumped on Friday and was on pace for its biggest daily percentage gain in seven weeks as it extended gains after a stronger-than-expected US payrolls report.

The Labor Department said US nonfarm payrolls jumped by 165,000 jobs last month, topping the 65,000 estimate of economists polled by Reuters, after an upwardly revised 60,000 gain in September, while the unemployment rate dipped to 4.1%.

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The report gives the Federal Reserve latitude to continue to hike interest rates, and market expectations for an increase of at least 25 basis points at the central bank's December meeting moved back up towards 80% in the wake of the report, according to the CME FedWatch Tool.

The dollar index , which measures the greenback against a basket of currencies, surged 0.63% to 102.12, with the euro tumbling 0.55% at $1.1157. The dollar was on track for its biggest daily percentage gain since September 16, while the euro was on pace for its biggest daily drop since October 7.

Expectations the Fed would hike next month had fallen to about 67% on Thursday as US equities plummeted, with the S&P 500 .SPX wiping out about $3 trillion in market value while the Nasdaq .IXIC suffered its biggest one-day percentage drop in 19 months on fears that tougher government regulations on the AI buildout after the US midterm elections would stunt economic growth.

Democrats are planning to unleash a flood of new legislation targeting artificial intelligence systems and data-center development when they take control of the US Congress in January, lawmakers, congressional aides and advocates said.

MARKET DYNAMICS SHIFT AFTER DATA

The dollar was higher before the jobs data, buoyed by safe-haven demand, as the selloff in AI stocks spread worldwide, although US stocks had stabilized in the early stages of trading and the Nasdaq rallied nearly 2%.

Treasury yields moved higher in the wake of the jobs report, with the 10-year yield up 3.1 bps to 4.868% and the 2-year yield rising 5.5 bps to 4.532%.

"It's the same old conversation of, at any given moment, is the dollar trading more on a safe-haven basis, or is it trading more on an interest rate differential basis? And those things, sometimes it's one or the other, and they can be completely at odds with one another, and it's not really rational," said Eugene Epstein, head of trading and structured products at Moneycorp in Stamford, Connecticut.

"Now that the dust is kind of settling a little bit, the market's digesting the new normal for the next two years, I would argue that the correlations should start being a little more rational again going forward."

CENTRAL BANKERS ADDRESS INFLATION

New York Federal Reserve President John Williams said on Friday that US economic growth has remained remarkably resilient in the face of successive shocks but inflation is too high and it is essential to bring it back to 2%.

Separately, the European Central Bank's chief economist Philip Lane said the central bank's main job is to ensure that any spillover from high energy prices to other prices is limited and that inflation can be returned to 2% "over the next year or two."

Sterling dropped 0.62% to $1.3366, pulling back following a climb to a more than seven-week high on Thursday after the Bank of England raised interest rates for the first time in over three years.

The Japanese yen weakened 0.3% against the greenback to 158.20. Japanese Prime Minister Sanae Takaichi unveiled a plan on Friday to tap proceeds from the Bank of Japan's sales of exchange-traded funds to finance her flagship investment projects, as the AI-fueled market rout threatened to dent tax revenue.