Dollar firms as solid US data suggests Fed likely to slow easing cycle
Gertrude Chavez-Dreyfuss
Updated 5 min read
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The dollar strengthened on Tuesday as U.S. economic data showing a generally stable jobs market and a still robust services sector suggested that the Federal Reserve will likely slow the pace of its current rate-cutting cycle.
The greenback rose to a near six-month peak against the yen after the U.S. data. It was last up 0.2% at 157.875 yen. Earlier in the global session, the dollar hit its highest since July of 158.425 yen.
Data showed that U.S. job openings unexpectedly increased in November, although hiring slowed during the month. Job openings, a measure of labor demand, rose 259,000 to 8.098 million by the last day of November, according to the Bureau of Labor Statistics' Job Openings and Labor Turnover Survey, or JOLTS report. Hires, however, dropped 125,000 to 5.269 million in November.
U.S. services sector activity also accelerated in December, while a surge in a measure of prices paid for inputs to a near two-year high pointed to elevated inflation. The Institute for Supply Management's non-manufacturing purchasing managers index (PMI) increased to 54.1 last month from 52.1 in November.
"The really big surprise in the report was the jump in the prices paid index to an eleven-month high of 64.4 in December from 58.2 — perhaps this reflects higher transportation costs or delivery charges in the holiday season," wrote Dave Rosenberg, founder and president of Rosenberg Research, in a note to clients.
"Suffice it to say that the (ISM) report was enough to push the markets to now expect a little more than one Fed rate cut for the year, and that has now been delayed to July from June."
Following the data, the U.S. rate futures market has priced in a 95% chance of a pause in rate cuts this month, and a 4.8% probability of easing, according to LSEG estimates. Rate futures have also implied just 37 basis points of cuts in 2025, compared with two cuts expected under the Fed's "dot plot" or rate forecasts.
Investors are also assessing whether President-elect Donald Trump's actual policies on tariffs will be consistent with his hard-line rhetoric.
Market participants have been pricing in a scenario where the implementation of widespread tariffs could boost U.S. inflation, potentially limiting the Fed's ability to cut interest rates and thereby supporting the dollar.
But they wondered whether officials are preparing to water down some of Trump's campaign promises. Trump on Monday denied a Washington Post report that said his aides were exploring tariff plans that would only cover critical imports.
Karl Schamotta, chief market strategist, at Corpay in Toronto thinks, however, that the market is betting Trump "will ultimately implement a narrower set of tariffs on major trading partners, and is downgrading U.S. inflation and rate expectations in line with that."
In afternoon trading, the U.S. dollar index, which measures the currency against six major units, rose 0.2% to 108.55, after dropping as low as 107.74 overnight, its weakest since Dec. 30.
On Jan. 2, the index hit a high of 109.58, a more than two-year peak, due to expectations that Trump's promised fiscal stimulus, reduced regulation, and higher tariffs would boost U.S. growth.
The euro, on the other hand, fell 0.4% to $1.0352, extending its fall after the economic numbers. The currency earlier rose after Tuesday's Eurostat data showed inflation in the 20 nations sharing the euro rose to 2.4% last month from 2.2% in November.
Meanwhile, euro zone households increased their inflation expectations in November, an ECB poll showed. Inflation in the 20 euro zone nations picked up to 2.4% last month from 2.2% in November, Eurostat said on Tuesday.
Investors are also looking to ahead to Friday's U.S. nonfarm payolls report. A Reuters poll showed a consensus forecast of 160,000 in December, down from 227,000 new jobs created in November.
"The health of the U.S. labor market is paramount to expectations for the Federal Reserve's actions this year so it's likely that, save for major news on the incoming administration, we could see calmer FX waters through Friday morning," said Helen Given, FX trader, at Monex USA in Washington.
In cryptocurrencies, bitcoin tumbled more than 5% to $96,322.43, after earlier hitting a three-week high.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by and Stefano Rebaudo in Milan and Kevin Buckland in Tokyo; Editing by Bernadette Baum, Mark Potter, Sharon Singleton and Alistair Bell)
