The US dollar soared to its highest level in more than a year against a basket of major currencies on Friday, as the latest US jobs report showed that the US economy added a stunning 336,000 jobs in September, far exceeding expectations and indicating that the labor market is nowhere near any form of landing at all.
September Jobs Report Shatters Forecasts
The Bureau of Labor Statistics released its September jobs report on Friday, revealing that non-farm payrolls increased by 336,000 last month, much more than the 170,000 that economists had expected. The unemployment rate remained unchanged at 3.8%, while the labor force participation rate edged up slightly to 61.8%. The average hourly earnings rose by 0.4% month-over-month and 4.6% year-over-year, beating estimates of 0.3% and 4.5%, respectively.
The report also revised the previous two months’ figures upward, adding a total of 38,000 more jobs than initially reported. The US economy has now recovered 17.4 million of the 22.4 million jobs lost during the pandemic, and is only 4.3 million jobs short of its pre-crisis level.
The September jobs report was widely seen as a crucial indicator of the health and direction of the US economy, as well as a key factor for the Federal Reserve’s monetary policy decisions. The strong numbers suggest that the labor market is still resilient and robust, despite the challenges posed by the Delta variant, supply chain disruptions, inflation pressures, and labor shortages.
Fed Faces Tough Balancing Act
The impressive jobs data also raised expectations that the Fed will soon announce its plans to taper its monthly bond purchases, which currently amount to $120 billion. The Fed has been signaling that it will start reducing its stimulus program before the end of the year, as long as the economy continues to make progress toward its goals of maximum employment and stable inflation.
However, the Fed also faces a tough balancing act, as it tries to avoid triggering a sharp market reaction or a premature tightening of financial conditions that could derail the recovery. The Fed has repeatedly emphasized that tapering is not tantamount to raising interest rates, and that it will keep its benchmark rate near zero until it sees clear evidence of sustained inflation above its 2% target and further improvement in the labor market.
The Fed’s next policy meeting is scheduled for November 2-3, when it is widely expected to provide more clarity on its tapering timeline and pace. Some analysts believe that the Fed could announce a reduction of $15 billion per month starting in December, while others think that the Fed could opt for a faster tapering of $20 billion per month starting in November.
Dollar Rallies Across the Board
The US dollar reacted positively to the strong jobs report, as it gained ground against most of its major peers. The dollar index, which measures the greenback’s performance against a basket of six currencies, rose by 0.6% to 94.44 on Friday, reaching its highest level since September 2020.
The dollar benefited from both higher bond yields and increased demand for safe-haven assets, as investors weighed the implications of the jobs data for the Fed’s policy outlook and the global economic recovery. The yield on the 10-year Treasury note jumped by 9 basis points to 1.61%, its highest level since June.
The dollar was particularly strong against the euro, which fell by 0.7% to 1.1562 on Friday, hitting its lowest level since July 2020. The euro was weighed down by weaker-than-expected economic data from Germany and France, as well as concerns about rising energy prices and political uncertainty in Europe.
The dollar also gained against the British pound, which dropped by 0.5% to 1.3608 on Friday, amid renewed Brexit tensions and doubts about the Bank of England’s hawkish stance. The dollar also advanced against the Japanese yen, which slipped by 0.3% to 111.64 on Friday, as risk appetite improved and Japan’s new Prime Minister Fumio Kishida pledged to boost fiscal spending.
The dollar was slightly weaker against the Canadian dollar, which edged up by 0.1% to 1.2589 on Friday, after Canada also reported a better-than-expected jobs report for September. Canada added 157,000 jobs last month, beating forecasts of 68,000, while the unemployment rate fell to 6.9%, its lowest level since February 2020.