Dollar advances as Fed likely to slow rate cut pace after US jobs data

The US dollar gained on Tuesday after economic data showing a generally stable jobs market and a still robust services sector suggested that the Federal Reserve will likely slow the pace of its current rate-cutting cycle.

The greenback rose to a near six-month peak after the US data. It was up 0.4 per cent at 158.195 yen. Earlier in the global session, the dollar hit its highest since July of 158.425 yen. 

 

The euro, on the other hand, slipped 0.1 per cent to $1.0378, extending its fall after the data.

 

Data showed that US job openings unexpectedly increased in November, although hiring slowed during the month. Job openings, a measure of labor demand, rose 259,000 to 8.098 million by the last day of November, according to the Bureau of Labor Statistics Job Openings and Labor Turnover Survey, or JOLTS report.

Hires, however, dropped 125,000 to 5.269 million in November. Layoffs were little changed at 1.765 million.

At the same time, US services sector activity accelerated in December, while a surge in a measure of prices paid for inputs to near a two-year high pointed to elevated inflation. The Institute for Supply Management's non-manufacturing purchasing managers index (PMI) increased to 54.1 last month from 52.1 in November amid strong demand.

"The data definitely backs a pause from the Fed this month. It's quite likely the Fed sits back and waits to cut further until at least March," said Helen Given, FX trader at Monex USA in Washington.

"Chatter from Fed officials lately backs this as well, and the central bank will also have to contend with potentially inflationary economic and trade policy from the Trump administration as well. The Fed will in all likelihood slow its easing schedule substantially this year, and we don't see a January cut as on the table at all."

Following the data, the US rate futures market has priced in a 93 per cent chance of a pause in rate cuts this month, and a 6.9 per cent probability of easing, according to LSEG estimates. Rate futures have also implied just one rate cut this year of 25 basis points.

Investors are also assessing whether President-elect Donald Trump's policies on tariffs will align with his rhetoric.

Market participants have been pricing in a scenario where the implementation of widespread tariffs could boost US inflation, potentially limiting the Federal Reserve's ability to cut interest rates and thereby supporting the dollar's strength.

Now, they are wondering whether officials are preparing to water down some of Trump's campaign promises, while a lot of uncertainty remains about future moves in US policy.

Trump on Monday denied a Washington Post report that said his aides were exploring tariff plans that would only cover critical imports.

In late morning trading, the US dollar index, which gauges the currency against major rivals rose 0.2 per cent to 108.48, after dropping to as low as 107.74 overnight, its weakest since Dec. 30.

On Jan. 2, the index hit a high of 109.58 for the first time since November 2022, largely due to expectations that Trump's promised fiscal stimulus, reduced regulation and higher tariffs would boost US growth.

"With numerous large policy shifts on the horizon, markets should be prepared for a lot more volatility ahead," said George Saravelos, head of global forex strategy at Deutsche Bank.

On tariffs specifically, "there are likely to be multiple overlapping legislative and executive initiatives with rolling deadlines and announcements throughout the year," he added.