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Jobs Data Aided Dollar's Tumble Last Week

The week ended May 3 witnessed heavy losses for the Dollar as a weaker-than-expected job market update renewed hopes of a rate cut by the U.S. Federal Reserve. The Dollar plunged against the euro, the British pound, the Australian Dollar as well as the Japanese Yen. The 6-currency Dollar Index also recorded a sharp decline.

Amidst contrasting expectations of a Fed rate cut, the Dollar Index, slipped 0.95 percent during the week spanning April 27 to May 3. Though monetary policy jitters had lifted the Index to a high of 106.49 on Wednesday, the disappointing labor market update dragged it down all the way to 104.52 on Friday. The Index which stood at 106.09 on April 26 eventually closed at 105.08 on May 3.

As widely expected, the Federal Reserve, on Wednesday held rates steady at the 5.25 percent – 5.5 percent range. The Fed downplayed the prospect of a rate hike and also reduced the pace of quantitative tightening beginning June 1. It however acknowledged the lack of further progress toward the Committee’s 2 percent inflation objective in the recent months.

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The job market update by the U.S. Bureau of Labor Statistics that followed on Friday revealed a decline in the indicators for hiring and earning, as well as an unexpected jump in the unemployment rate.

The addition to non-farm payrolls was 175 thousand in the month of April, versus 315 thousand in the previous month and market expectations of 243 thousand. The unemployment rate which was expected to remain steady at 3.8 percent increased to 3.9 percent. Average hourly earnings (month-on-month) which was expected to be steady at 0.3 percent unexpectedly declined to 0.2 percent. Average hourly earnings (year-on-year) declined to 3.9 percent, from 4.1 percent earlier, versus market expectations of a reading of 4 percent.

With the cooling labor market expected to reduce the pressure on inflation, expectations of a rate cut increased. Given the Fed’s dual mandate of achieving maximum employment and price stability, weaknesses in the labor market added to the perception of an increased headroom available to the Fed to soften the restrictive interest rate environment. The renewed rate cut hopes also simultaneously weakened the sentiment for the Dollar.

Amidst the Dollar’s weakness, the EUR/USD pair rallied 0.66 percent during the week ended May 3. From 1.0692 on April 26, the pair increased to 1.0763 by May 3. The pair oscillated between the weekly low of 1.0649 recorded on Wednesday and the weekly high of 1.0812 touched on Friday. Data released on Tuesday had shown a higher-than-expected GDP reading or the first quarter and a steady inflation update that matched expectations.

The sudden spurt in Fed rate cut expectations boosted the GBP/USD pair as well, which gained 0.46 percent during the week ended May 3. The pound sterling which was at $1.2489 on April 26 increased to $1.2547 in a week’s time. The weekly trading range was between $1.2465 and $1.2635.

With a spike of 1.15 percent against the greenback, the surge in the AUD/USD pair was quite emphatic. The pair, which had closed trading at 0.6533 on April 26 jumped to 0.6608 in a week’s time amidst the monetary policy divergence between the Federal Reserve and the Reserve Bank of Australia. Amidst speculations of hotter-than-expected consumer price inflation goading the RBA to a potential hike in interest rates, the weekly trading for the AUD/USD pair ranged between 0.6464 and 0.6649.

The greenback’s weakness as well as a suspected regulatory intervention by the Japanese govt helped the yen gain against the U.S. dollar during the week ended May 3. The USD/JPY pair which had breached the psychological level of 160 after a gap of around 34 years on Monday declined all the way to 151.86 on Friday. The USD/JPY pair plunged 3.4 percent as it declined from the level of 158.33 on April 26 to close at 152.98 on May 3.

Though Fed rate cut hopes dominates currency markets, on the horizon are key events that could sway currency market sentiment considerably. These include the Reserve Bank of Australia’s interest rate decision due on Tuesday, the release of the Summary of Opinions by Bank of Japan on Wednesday and the Bank of England’s monetary policy review due on Thursday.

Amidst the anticipation, the Dollar Index has slipped to 104.94. The EUR/USD pair has firmed up to 1.0785 whereas the GBP/USD pair increased to 1.2586. The AUD/USD pair has rallied to 0.6632. The USD/JPY pair has in the meanwhile increased to 153.70.

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