The value of the dollar spiked dramatically yesterday as traders bet on the Federal Reserve hiking interest rates early next year to dampen the surging domestic economy.
In response to the latest employment report, which showed that the world’s biggest economy saw the creation of 248,000 new jobs in September, the dollar shot up 1 per cent against sterling.
Against the euro the greenback gained more than half a cent while the dollar index, a weighted measure of the currency’s purchasing power, rose 0.8 per cent. The index posted a seventh weekly gain, its strongest run since June 2010. “With the Fed sounding ever more hawkish about an interest rate rise, the bulls and the hawks are likely to drive the dollar to new heights in October” said David Lamb of Fexco.
Paul Dales of Capital Economics said the “stellar” release made it more likely that the Fed will push through its first rate rise in March next year, rather than waiting until next June, as some had expected.
The yield on 10 year US government debt jumped by 3 basis points to 2.48 per cent in the wake of the figures, while the S&P 500 Index was up 1 per cent. The FTSE 100 Index jumped 81.52 points to 6527.9, breaking four days of falls.
Analysts said the September jobs figure had made it clear there is significant momentum behind the American recovery, erasing the disappointment of the payrolls report in August. That month’s 142,000 figure was revised up to 180,000.
The latest survey snapshot the US services sector yesterday also pointed to robust growth with the Markit index at 58.9 last month, well above the 50 mark that signal growth. The composite index, which includes manufacturing, posted a reading of 59.
Alongside the monthly increase in new non-farm payrolls, which was greater than analysts had been expecting, the Bureau of Labour Statistics reported the unemployed rate declined from 5.9 per cent, down from 6.1 per cent in the previous month and the lowest headline rate since July 2008.
This was helped by a 97,000 drop in the size of the labour force, with the participation rate slipping to 62.7 per cent, its lowest level since 1978.
There was also another disappointment on wages, with average pay growth slipping back to 2 per cent year on year from 2.1 per cent in the previous month. Marcus Bullus of MB Capital described the weak pay figures as an “enigma”. “You’d expect to see wages rising with more gusto in an improving jobs market, but this just isn’t happening. Businesses are hiring but there’s a deep-seated conservatism on wages” he said.
There was also a question mark over the quality of the new jobs. Retailers added 35,300 positions while business services accounted for 81,000. The leisure industry added 33,000 and many jobs in those sectors are low-paid and part-time.
The Federal Reserve’s programme of asset purchases is due to come to an end this month. In total the US central bank has spent more than $4trn in buying American bonds and mortgage backed securities in order to support economic activity.
The Fed will now assess whether the economy is strong enough to withstand higher interest rates.Reuse content