Dollar jumps after strong US payrolls report 

By Chuck Mikolajczak

NEW YORK, Nov 6 (Reuters) - The US dollar index surged on Friday and was poised for its biggest daily percentage gain in nearly five months after a stronger-than-expected US payrolls report solidified expectations for a rate hike from the Federal Reserve next month.

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. The unemployment rate dipped to 4.1%.

https://www.reuters.com/graphics/AUTOMATED-202610/US-JOBS-13M/znpngwbwnvl/chart.png

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 0.77% to 102.26, with the euro tumbling 0.67% at $1.11437. The dollar was on track for its biggest daily percentage gain since June 17, while the euro was on pace for its biggest daily drop since October 1.

For the week, the dollar was up 0.3% while the euro shed 0.1% and was on track for a third straight weekly decline.

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 by the opening bell and the Nasdaq rallied more than 1% heading into the latter stages of the trading day.

Treasury yields moved higher in the wake of the jobs report, with the 10-year yield up 1.6 bps to 4.85% and the 2-year yield rising 4.1 bps to 4.52%.

"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

Comments from Fed officials on Friday supported views for a rate hike. 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, St. Louis Federal Reserve President Alberto Musalem said that inflation remains a top concern in conversations he has with businesses in his Midwestern district while Federal Reserve Bank of San Francisco President Mary Daly said the Fed will likely still need to hike rates further even with the "painful" tech stock selloff.

Sterling tumbled 0.71%, on pace for its biggest daily drop since September 23, to $1.3355, 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 pound was off nearly 0.3% on the week, and set for its first weekly decline after notching gains for three straight weeks.

The Japanese yen weakened 0.47% against the greenback to 158.430. Japanese Prime Minister Sanae Takaichi unveiled a plan 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.

Bank of Japan Governor Kazuo Ueda said the central bank expects underlying inflation to stay around its 2% target but recognizes there are "some upside risks."

The yen was off nearly 0.6% on the week, which would mark its biggest weekly percentage decline since a drop of more than 2% in the week ended September 18.