Dollar at two-decade high as payrolls loom

September 02, 2022: The dollar was headed for a third weekly gain in a row and stood near its highest levels for decades on the euro and yen on Friday, with investors in little mood for selling ahead of U.S. labor data that could bolster the case for interest rate hikes.

A solid U.S. manufacturing survey overnight was enough to push the greenback above 140 yen for the first time since 1998 and it also hit a 2-1/2 year high against sterling and six-week highs on the Australian and New Zealand dollars.

Against the stronger dollar, the euro fell back below parity and at $0.99, it was not far from last week's 20-year low of $0.99. The yen steadied at 139.91 per dollar after making a trough of 140.27 in early Asian trading.

The dollar index made a two-decade top at 109.99 in the New York trade and was last at 109.56. It is up more than 1% in the week since Federal Reserve Chair Jerome Powell said at Jackson Hole, Wyoming that rates would need to be high "for some time" to control inflation, somewhat surprising markets.

Sterling fell 0.7% overnight and is down about 1.5% this week. It was last at $1.1552 after touching $1.1499 overnight. 

The Australian and New Zealand dollars are each down about 1% on the week, with the Aussie last at $0.6792 and the kiwi flirting with $0.6077, its lowest levels since the onset of the pandemic in 2020 when the U.S. dollar soared.

"We had thought that the slowing of the economy would be enough to pause Fed hiking by November but Powell's clear nod to restrictive policy points to a higher bar to a pause," said Steve Englander, head of G10 FX research at Standard Chartered.

"We think U.S. labour data would have to slow dramatically to deter a 75 basis point policy rate hike," he said.

Non-farm payrolls data is due at 1230 GMT and economists expect 300,000 jobs were added in August, which would extend a strong run of data. A surprise well below 275,000 would be needed to change the rates outlook, Englander said.

Fed funds futures are pricing about a 75% chance that the Fed hikes rates by 75 bps next month and it has been a week of heavy selling in the Treasury market, lifting two-year yields by 12 bps and 10-year yields by 23 bps. 

The two-year yield hit a 15-year high of 3.551% overnight and the 10-year hit a 2-1/2 month high of 3.297%.

The moves have supported the dollar's march on the yen in particular since Japan's yields are anchored near zero.

Japan's government was watching currency moves with an acute sense of urgency, Chief Cabinet Secretary Hirokazu Matsuno said on Friday.

Central bank meetings are due in Europe and Australia next week and markets expect hikes. Traders see about a 60% chance of a 50 bp hike in Australia and an almost 80% chance of a 75 bp hike from the European Central Bank.

Reuters