Wages Fuel Dollar Optimism Even as Poor Payrolls Dent Greenback

(Bloomberg) -- The dollar rally may have more room to run even after Friday’s poor U.S. payrolls number.

The greenback pulled back against most of its Group-of-10 counterparts Friday as the employment report showed the weakest hiring in more than a year. Yet with wage gains running at the fastest pace in almost a decade, some strategists say the labor market is still solid and the U.S. currency has room to advance. The Bloomberg dollar index is poised for its second straight weekly gain and close to its peak for 2019.

The greenback rally had gained steam in recent days as central banks from Canada to Europe shifted to a more downbeat assessment of their economies. The slowdown in U.S. payrolls -- which climbed by just 20,000 in February -- could be the result of one-off factors, according to Jane Foley, head of foreign-exchange strategy at Rabobank in London.

“I do not expect the U.S. dollar to weaken substantially on the back of this report, in part because of the earnings number and also because of the more dovish outlook now being associated with several other major central banks,” Foley said. Wages are “strong, which is a sign of a tight labor market. On its own this should be U.S. dollar positive.”

The Bloomberg dollar index was down 0.3 percent as of 10:55 a.m. in New York and was on track for its first daily decline since Feb. 26. It was up around 0.7 percent on the week. The dollar was down 0.4 percent against the Japanese currency on Friday, trading around 111.17 yen, while it was off by around 0.3 percent at $1.1231 per euro.

Underlying Details

Win Thin, global head of currency strategy at Brown Brothers Harriman in New York, said the market’s knee-jerk reaction might be to “take some profits on dollar longs.” Yet he saw the underlying details of the employment report as “largely dollar-positive.”

The increase in non-farm payrolls for February was less than the median analyst estimate of 180,000, although the previous month’s gains were revised up to 311,000, a Labor Department report showed Friday. Average hourly earnings rose a better-than-projected 3.4 percent from a year earlier, while the jobless rate declined to 3.8 percent, near a five-decade low.

“I really don’t think this is going to cause the Federal Reserve to reassess its path on monetary policy and as a result the implications for the currency are going to be pretty modest,” said Nick Bennenbroek, head of currency strategy at Wells Fargo Securities. “You’re going to have to wait much later in 2019 when the Federal Reserve is more clearly towards the end of its rate cycle.”

He sees the euro-dollar exchange rate holding in a $1.10 to $1.15 range over the next three-to-six months, but says he would be “somewhat surprised if we got anywhere near the lower end of that range.”

Treasury Yields

Investors are also optimistic about the dollar as yields on U.S. bonds continue to look relatively elevated versus global counterparts. While the yield on the 10-year Treasury slipped slightly Friday, at around 2.64 percent it remains considerably higher than major developed market peers from Canada and Australia to Europe and Japan.

Ed Al-Hussainy, senior rates strategist at Columbia Threadneedle, said this latest labor market report won’t shift his core market views and that he continues to favor Treasuries and likes the U.S. dollar against the euro, Canadian dollar and Australian dollar.

Brad Bechtel, global head of foreign-exchange at Jefferies, expects the recent dollar trend to persist as global data remain negative, and the greenback to be relatively range-bound in the short term before turning lower later this year. He says the rise in U.S. wages could lend support to a more hawkish Fed shift.

“Will the Fed interpret this as a reason they should continue hiking at some point this year or not?” said Bechtel. “That’s sort of not what the market was looking for. It adds to the confusion and the uncertainty.”

--With assistance from Emily Barrett and Katherine Greifeld.

To contact the reporters on this story: Susanne Barton in New York at swalker33@bloomberg.net;Misyrlena Egkolfopoulou in New York at megkolfopoul@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum

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