Dollar Edges Higher Ahead of Jobs Report; Powell Choice at Fed Tempers Gains

The U.S. dollar inched higher in European trading as investors put cautious bets in place ahead of the Labor Department’s October employment report that is expected to show a surge in post Hurricane Harvey hiring.

The dollar index, which benchmarks the greenback against a basket of six global currencies, was marked 0.11% higher at 94.79 by 06:30 eastern while benchmark 10-year U.S. Treasury yields rising 1 basis point to 2.35%.

U.S. employers are expected to have added around 310,000 new jobs last month, according to a consensus of analysts’ forecasts, a massive swing from the 33,000 that were lost last month as firms stepped-up hiring in Texas, Louisiana and Florida in the wake of Hurricanes Harvey and Irene. The headline employment rate, however, is expected to remain steady and 4.2%.

The dollar’s gains have been tempered, however, by last night’s confirmation by President Donald Trump of his choice of Jerome Powell to replace Janet Yellen as head of the Federal Reserve next year.

Powell, a Fed Governor who is not a trained economist but nonetheless built a successful career on Wall Street through the private equity industry, is considered somewhat of a centrist with respect to interest rate policy and could provide a smooth transition from Yellen’s dovish assessment of borrowing costs in the world’s biggest economy.

“Powell appears to be very similar to Yellen in terms of thinking and voting. So from a monetary policy perspective, the directives from the Fed’s leadership are unlikely to alter markedly,” wrote ING’s chief international economist James Knightley. “He has never dissented at the FOMC meetings and is fully on board with the “gradual” increases in the Fed funds rate and the balance sheet shrinkage strategy.”

However, analysts at Bank of America Merrill Lynch think investors may be mis-pricing the path of future rate hikes, irrespective of who serves as Fed Chairman.

“Stronger growth is causing markets to reprice U.S. rate expectations to the upside,” the bank said in a client note. “That has driven the US 10Y to around 2.4% and the (dollar) higher. Yet expectations remain well below the dot plot. We think further adjustment is needed, pushing yields and the (dollar) higher into year end.”

The jobs numbers could certainly cement the case for faster-than-expected U.S. growth, even as the economy expands at a 3% clip over the past two quarters, and thus accelerate the case for faster-than-expected rate hikes next year.

However, a key metric inside the Labor Department’s report will be the pace of wage increases over the month of October, which may have only rise 0.1% from the previous month. If central bankers aren’t seeing a “pass through” from faster growth into weekly pay, they may temper their assumptions for consumer price increases in the months ahead and that could alter market perceptions for future rate increases.

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