Dollar surges to two-month high after May jobs report boosts rate hike bets

The U.S. dollar surged to a near two-month high on Friday, and posted gains for the week, helped by a lack of progress in peace efforts in the Middle East and strong labor market data that strengthened expectations for interest rate hikes.  

At 16:36 ET (20:36 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was up 0.7% to 100.06, its highest level since early April. For the week, the dollar was on pace to firm by 1.2%.

Yields surge, rate hike bets rise after massive beat in May jobs report

Currency market participants were focused on the May nonfarm payrolls report on Friday for cues on monetary policy. According to the Bureau of Labor Statistics, the U.S. added 172k jobs last month, easily blowing past expectations of a rise of 85k. The unemployment rate remained unchanged at 4.3%. Total nonfarm payroll growth was also revised higher for March and April by a combined 93k.

The data, coming on the heels of other positive indicators on the labor market this week, suggests that the maximum employment part of the Federal Reserve’s dual mandate is under control and that the inflationary side is a bigger concern. With oil prices still elevated and price pressures increasing, the strong jobs report also likely rules out interest rate cuts for the time being. In fact, traders on Friday increased their odds for rate hikes this year after the data.

The rise in rate hike bets also made government debt less attractive, with investors dumping bonds which boosted Treasury yields. According to the CME FedWatch tool, a quarter-point rate hike is now being fully priced in by the end of the year. Higher rate environments tend to lift the dollar.

The jobs report comes at a time when the Fed has seen a chair transition to Kevin Warsh from Jerome Powell. President Donald Trump has repeatedly called for rate cuts since taking office for his second term.

"For the FOMC meeting in mid-June, Warsh’s first as chair, today’s report should cement the case for a hawkish drift in communications since the last meeting in late April," JPMorgan’s Michael Feroli said.

"The implicit easing bias in the statement—represented by the phrase ’additional adjustments’—will likely be dropped. We expect the median dot to shift to show policy rates remaining unchanged for the remainder of the year, as opposed to the one cut projected in the last dot plot from March. It also seems probable that the 11 non-chair members of the FOMC will see no good case for a rate cut anytime soon," he said. 

"Whether Warsh faithfully conveys that sense in the press conference will go a long way toward assessing his effectiveness in leading the Committee. We continue to look for rates on hold this year before the next move being a hike next year," Feroli added.

The rise in rate hike bets and sell-off in bonds also pressured U.S. equities on Friday. Trump later at a press gaggle praised the jobs numbers.

"I’m going to let (Warsh) make that decision. I’d like to see lower interest rates," the president said, when asked whether the Fed should cut rates at its next meeting. 

Middle East tensions elevated after Hezbollah rejects Israel-Lebanon ceasefire

Turning to the Iran war, hopes for progress in diplomatic efforts to end the fighting took a hit after Hezbollah dismissed a ceasefire between Israel and Lebanon. Iran, which is aligned with Hezbollah militants, has made a cessation in fighting in Lebanon a key demand in peace negotiations.

The U.S. and Israel launched a joint assault on Iran in late February that has since spread to include other areas in the region, including Lebanon.

In a statement, Hezbollah’s leader described the U.S.-brokered agreement between Israel and Lebanon earlier this week as "absurd, humiliating, and insulting." According to the Associated Press, the announcement came as Israeli attacks killed at least four people. Lebanese troops moved into areas of southern Lebanon on Thursday which have been the scene of intense fighting for months, the AP said, citing state media.

The ceasefire had been seen as a positive step towards a broader peace deal between the U.S. and Iran. Meanwhile, the critical Strait of Hormuz continues to be all but shut, leading to the biggest oil supply disruption in history and surging oil prices, which in turn have led to an inflationary shock around the world. Benchmark crude contracts were lower on Friday, but were headed for a weekly gain.