US Dollar rises as robust labor data buoy sentiment

FXStreetJan 8, 2025 6:31 PM

The Federal Reserve’s hawkish monetary stance contributes to rising Treasury yields, reinforcing the US Dollar’s current strength.
Rumors of a potential national economic emergency declaration bolster safe-haven demand and support the Greenback’s appeal.
Encouraging labor market figures, including lower jobless claims and steady employment gains, further amplify bullish sentiment.

The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, gained towards 109.00 on Wednesday, mainly due to strong labor market figures. The Federal Reserve’s (Fed) hawkish shift still supports elevated United States (US) bond yields, favoring the USD bulls. Meanwhile, geopolitical risks and trade war concerns help maintain safe-haven flows, capping any Greenback’s pullback.

Daily digest market movers: US Dollar sees gains as markets assess fresh labor data

US upcoming President Donald Trump may declare a national economic emergency to enact large-scale tariffs, spurring safe-haven bids for the US Dollar.
Long-term US bond yields continue climbing on heavy supply; the 10-year hovers near 4.70%, while the 30-year approaches 4.93%.
December’s Federal Open Market Committee (FOMC) minutes loom large after the Federal Reserve’s latest 25 basis point cut and pivot to a more hawkish stance, with some officials pushing for steady rates.
Labor data shine: Weekly initial jobless claims fell to 201,000, beating the 218,000 consensus. Private sector employment rose by 122,000 in December, though below market expectations.
Automatic Data Processing (ADP) notes a slowdown in hiring and pay gains, but health care leads job creation in the second half of 2024.
Reports of strong US economic outperformance continue, delaying the market’s Fed cut expectations.

DXY technical outlook: Indicators maintain momentum above key support

The US Dollar Index defended its 20-day Simple Moving Average, confirming underlying bullish momentum. Technical indicators show continued upward traction, yet they are not near overbought territory, suggesting room for additional gains. Any dips may be shallow, with buyers emerging on safe-haven flows and robust yield appeal. Unless a significant shift in sentiment occurs, the DXY looks poised to sustain its constructive bias in the sessions ahead.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Disclaimer: For information purposes only. Past performance is not indicative of future results.