The U.S. dollar was close to its highest level in seven weeks on Monday following a rally driven by strong U.S. jobs data and increased tensions in the Middle East. The dollar's rise was a result of a robust U.S. jobs report for September, which indicated significant job growth, a decrease in the unemployment rate, and steady wage increases. Analysts noted that several factors that had previously weakened the dollar, such as recession concerns, had reversed. They also mentioned that the market's expectations for Federal Reserve rate cuts had diminished. Francesco Pesole, a forex strategist at ING, stated that there was no apparent reason to rebuild short positions on the U.S. dollar in the near future.
Regarding the dollar index, it was up 0.05% at 102.60, having reached a seven-week high of 102.69 on Friday. This marked a more than 2% increase for the week, the largest in two years. MUFG highlighted that the dollar index had neared the 100.00 support level for the second time recently. In terms of future influences on the dollar, Lefteris Farmakis, a forex strategist at Barclays, mentioned that China's fiscal stimulus plans and macroeconomic data would play significant roles.
In the Middle East, Israel conducted airstrikes in Lebanon and the Gaza Strip ahead of the anniversary of previous attacks that had led to conflict. Israel's defense minister stated that all options were on the table for responding to Iran. The euro was at $1.0970, down 0.06%. Barclays' Farmakis suggested that effective fiscal measures in Italy and France could benefit the euro by strengthening sovereign creditworthiness and the credibility of the euro area project.
The yen fell slightly against the dollar, reaching 149.10 before recovering to around 148.60. This decline followed comments from Japan's new prime minister, Shigeru Ishiba, which hinted at a delay in rate hikes. U.S. 10-year Treasury yields hit a new 2-month high at 4.016% in London trade. Barclays believed that yields could increase by 20 bps, even in pessimistic economic scenarios, due to strong jobs data reinforcing expectations of a gradual Fed easing cycle.
BofA predicted that the Fed would reduce rates by 25 bps per meeting until March 2025, followed by 25 bps per quarter until the end of 2025. Market expectations for a Fed rate cut in November had shifted to a 95% probability of a quarter-point decrease, up from 47% the previous week. Sterling fell by 0.4% against the dollar, experiencing its largest daily decline since April after remarks from Bank of England Governor Andrew Bailey led to a significant unwinding of long pound positions.
Chris
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