US Dollar climbs on robust NFP results, rises to multi-year highs

FXStreetJan 10, 2025 6:00 PM

December’s NFP report showed better results than expected.
The Federal Reserve’s easing timeline faces fresh scrutiny after Unemployment Rate falls.
Higher Treasury yields and lingering inflationary pressures reinforce the Greenback’s appeal across most major currency pairs.

The Dollar Index (DXY), which measures the value of the USD against a basket of currencies, rallies on renewed inflation concerns as the stronger than expected Nonfarm Payrolls (NFP) report pushes out the Federal Reserve’s (Fed) rate cut timeline, fueling US Dollar demand and driving the DXY closer to 110.00.

Daily digest market movers: US Dollar sees gains on a solid NFP report

December Nonfarm Payrolls soared by 256,000, far exceeding the 160,000 forecast and reinforcing labor market resilience.
Unemployment Rate dips to 4.1% from 4.2%, while wage inflation eased to 3.9% YoY, moderating Fed cut bets slightly.
Bloomberg consensus initially stood at 165K for December’s job gains, though many analysts had warned of upside risks.
Fed officials highlight diminished urgency for additional rate cuts, with concerns over major labor market slack now fading.
Strong labor data helps the US Dollar retain its gains with the Fed likely to continue gradual cuts later in 2025 if inflation cools.
Fed officials have shifted toward a more careful approach after December’s pivot.
The strong employment metrics reduce the need for imminent easing, while fresh developments in growth, inflation and fiscal policy remain key variables. Markets increasingly price in no additional cuts in the near term, reinforcing US Dollar strength.

DXY technical outlook: Index hits November 2022 highs near 110.00

The US Dollar Index soared to fresh peaks not seen since November 2022 and is now approaching the 110.00 mark. Technical indicators are verging on overbought territory, suggesting a potential short-term pullback.

Nevertheless, the DXY’s solid break above prior resistance signals ongoing bullish momentum, supported by firm economic data and tempered Fed rate cut expectations. Any dip may find support near the 108.50–109.00 range.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

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

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