Is the US Dollar Back in Charge as Jobs Data Shifts Rate Cut Bets?

Source: Kapitales Research

Highlights:

• The US dollar hit a six-week high after jobless claims fell to 198,000, well below expectations, supporting a stronger economic outlook.
• Markets have pushed back expectations for the first Federal Reserve rate cut to June, as inflation concerns persist at the time of writing.
• The firmer dollar weighed on major currencies like the euro and yen, while China’s yuan outperformed on trade and seasonal support.

Dollar Hits Six-Week High on Surprise Labour Market Strength

The US dollar climbed to a six-week high on Thursday after fresh economic data signalled unexpected strength in the American labour market, reinforcing expectations that interest rates could stay higher for longer. At the time of writing, the US Dollar Index rose around 0.24% to 99.31, briefly touching 99.49, its strongest level since early December. The move followed new figures from the US Labor Department showing that initial jobless claims fell by 9,000 to 198,000 in the week ended January 10. Economists had been expecting claims closer to 215,000, making the decline a clear upside surprise for markets.

Fed Rate Cut Expectations Shift Further Out

Improving labour market data has led investors to rethink when the US Federal Reserve may begin cutting interest rates. Futures markets are now pricing in the first rate cut around June, as policymakers remain cautious amid lingering inflation pressures. Recent remarks from Federal Reserve officials reinforced this view. Chicago Fed President Austan Goolsbee emphasised the need for the central bank to keep its attention on bringing inflation down, while Kansas City Fed President Jeff Schmid warned that price pressures remain “too hot”. San Francisco Fed President Mary Daly added that recent economic data has been supportive, even as risks to both inflation and employment persist. At the time of writing, the unemployment rate stands at 4.4%, lower than economists had anticipated, further supporting the case for policy patience.

Currency Markets React Globally

The stronger dollar weighed on major currencies, with the euro falling about 0.25% to $1.1613 at the time of writing, also marking a six-week low. Meanwhile, the Japanese yen weakened as investors grew concerned that Japan’s leadership may pursue more expansionary fiscal policies following upcoming elections. In contrast, China’s yuan has emerged as a regional outperformer. The currency has strengthened more than 1% over the past month, helped by seasonal demand, a large trade surplus and expectations of further economic stabilisation.

What Investors Are Watching Next

While the dollar’s rally reflects confidence in US economic resilience, some strategists warn that labour data may overstate true job strength. Markets will now closely track upcoming inflation readings and central bank commentary for confirmation on how long rates could remain on hold.

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