US Dollar Ready to Ride Jobs Gain After Yellen Clarifies Rate Plans

New York (Sept 27)  If employment forecasts are any indication, the dollar is about to have another good week.

A gauge of the greenback rose the most in two months after Federal Reserve Chair Janet Yellen clarified that she was one of the policy makers who believe an interest-rate rise would likely be appropriate this year. The prospect of higher U.S. rates raises the appeal of dollar-denominated holdings. An Oct. 2 jobs report is projected to add to the central bank’s case for reducing monetary stimulus.

"Faster hiring would pull a Fed rate hike into sharper focus and have the dollar poised for outperformance," said Joe Manimbo, an analyst with Western Union Business Solutions, a unit of Western Union Co., in Washington. "When you say next week, I get an image of Donald Trump saying, ‘Huge! Huge! Huge!’"

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, rose 1 percent this week in New York, the most since the five days through July 17. The U.S. currency added 0.9 percent against the euro and 0.4 percent versus the yen.

The Norwegian krone, which tumbled after the country’s central bank reduced its main interest rate, posted the biggest loss against the dollar this week.

The Labor Department will release a report that shows employers added 202,000 jobs in August, according to the median forecast of 73 economists surveyed by Bloomberg. Monthly gains have averaged 212,000 this year as the unemployment rate fell to 5.1 percent, the lowest level since April 2008.

In her remarks on Thursday in Amherst, Massachusetts, Yellen said "the economy is no longer far away from full employment" and that the Federal Open Markets Committee believes "that inflation will gradually return to 2 percent over the next two or three years."

On average, the Bloomberg Dollar Spot Index rose 0.3 percent one hour after the release of the past 12 employment reports, according to data compiled by Bloomberg.

"We’ll see another 200,000-plus gain, I have no reason to doubt that, and we’re obviously coming off a very strong second-quarter growth gain," said Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. "The dollar’s prospects will be solid."

Fed View

Fed Bank Presidents William Dudley, Charles Evans and John Williams are scheduled to speak about monetary policy and their outlook for the economy throughout next week. Yellen will also talk about community banking with Fed Bank of St. Louis President James Bullard during an event on Sept. 30.

Traders are pricing in a 18 percent probability of the U.S. central bank raising the benchmark rate by its October meeting and a 43 percent likelihood by the December meeting, according to data compiled by Bloomberg. That’s based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase from the zero to 0.25 percent target range the Fed has held since December 2008.

"It’s a tough call whether or not the Fed will pull the trigger in October, but I think the general tone of Ms. Yellen’s remarks suggested the Fed was just erring on the side of caution last week," said Western Union’s Manimbo. "The bank otherwise seems closer to tightening monetary policy than the market had expected."

The dollar has added 9.1 percent this year, the second-best performer behind the Swiss franc among 10 developed-nation counterparts, according to Bloomberg Correlation-Weight Indexes. The yen has gained 8.3 percent while the euro is little changed.

Source: Bloomberg