The Dollar Strengthens on U.S. Job Growth
The U.S. dollar holds steady and continues to show resilience, driven by robust employment data and ongoing geopolitical concerns in the Middle East. Last Friday’s U.S. jobs report revealed the highest jump in employment in six months, with unemployment falling and wages rising. This combination signals a strong U.S. economy, leading to reduced expectations for near-term Federal Reserve rate cuts.
Additionally, the escalating conflict in the Middle East further supports the dollar as investors seek safety in stable currencies. The yen, however, hit a two-month low against the dollar, sliding to 149.10 before stabilizing slightly at 148.40. The Japanese currency suffered its largest weekly decline since 2009, driven by concerns over Japan’s economic outlook and its stance on interest rates.
Middle East Conflict and Its Impact on Forex Markets
The ongoing tensions in the Middle East, particularly between Israel and Hezbollah, have heightened market uncertainty. Despite this, the dollar remains firm and holds steady as investors prioritize the strong U.S. economy over geopolitical risks. Brent crude oil prices also surged by 8% last week, further influencing market sentiment.
While energy price shocks remain a risk, market participants are optimistic about further gains in the dollar. The U.S. dollar index, which tracks the currency against its peers, reached a seven-week high, recording a 2% gain for the week—its best performance in two years.
Market Expectations for Federal Reserve and Other Currencies
After the U.S. job report, the likelihood of a 25 basis point rate cut by the Federal Reserve in November increased significantly. Investors now predict a 98% chance of this modest cut, with little expectation for a larger reduction. Meanwhile, the yen remains vulnerable, with Japan’s upcoming general election adding to the uncertainty. The currency is likely to hover between 145 and 149 in the coming weeks.
Sterling also struggled, falling 1.9% last week, its sharpest drop this year. The Bank of England’s cautious approach to cutting interest rates has contributed to the pound’s weakness, though expectations remain that rate cuts will proceed slowly.
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