Dollar strengthens after Aug jobs report backs Fed rate rise

THE dollar rose as US labor data for August bolstered expectations that the Federal Reserve (the Fed) will raise interest rates this month for the first time since 2006.

Led by gains against South Africa’s rand and the Brazilian real, the US currency climbed versus most of its 16 major peers as government statistics showed wages grew faster than forecast while the unemployment rate declined. The Fed is scrutinizing data for signs of inflation and job creation as it looks to raise its target from virtually zero.

The prospect of higher US rates raises the appeal of dollar-denominated holdings.

“It’s certainly very constructive for the broader dollar story,” Alan Ruskin, global head of Group of 10 foreign exchange at Deutsche Bank AG, said by phone from New York. “It was very consistent with the Fed tightening. The only question is whether market volatility will provide a window for them to tighten.”

The Bloomberg Dollar Spot  Index, which tracks the greenback versus 10 major peers, added 0.1 percent as of 5 p.m. in New York, gaining for a second straight week. The US currency fell 0.2 percent to $1.1149 per euro and declined 0.9 percent to 118.99 yen.

Jobs report

Currencies from commodity-exporting nations bore the brunt of the dollar’s gains, with the real losing 2.8 percent. The rand declined 2.1 percent, while the Australian dollar fell 1.6 percent.

“The commodity currencies are basically getting hit on risk-off sentiment,” said Fabian Eliasson, head of US corporate foreign-exchange sales in New York at Mizuho Financial Group Inc. “If you have a slowdown in world growth, a slowdown in the US, then certainly the commodity currencies will suffer from that.”

Average hourly earnings advanced 0.3 percent in August, the most since March, while the jobless rate dropped to 5.1 percent, the lowest since April 2008 and a level that the Fed considers to be full employment.

Fed policy-makers meeting in less than two weeks will weigh resilient US employment conditions against the recent turmoil in world financial markets as they debate the timing of any interest-rate increase.

The jobs report was reasonably strong, Fed  Bank of Richmond President Jeffrey Lacker said.

Traders saw a 30 percent chance of a rate increase when the Fed meets from September 16 and 17, according to data compiled by Bloomberg. The calculation is based on the assumption that the benchmark will average 0.375 percent after the Fed moves. The probability is up from 26 percent earlier Friday.

“The outlook for a stronger dollar remains very much intact,” said Omer Esiner, chief market analyst at currency brokerage Commonwealth Foreign Exchange Inc. in Washington. “It lays the groundwork for continued dollar buying over the next few weeks.” 

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