Dollar eases after hitting 13.5-year high; UK employment slowdown

XM Investment Research Desk: A resumption in the government bond sell-off drove the US dollar to fresh highs in Wednesday’s European trading but equities and commodities fell, weighed by the stronger dollar and rising bond yields.

The dollar index, which measures the greenback against a basket of currencies, reached a 13½-year high of 100.53 in mid-European session as US treasury yields continued to head higher again. The yield on 2-year US Treasury notes rose to a fresh 10-month high of 1.03% as investors upped their expectations of the number of rate increases by the Fed next year.

The odds of the Fed raising rates next month (as implied by Fed Funds futures) has risen to over 90% compared to around 70% before the election. Expectations that US President-elect Trump will cut taxes and increase infrastructure spending has fuelled speculation of a more aggressive rate hike cycle. St. Louis Fed President James Bullard today added to the expectations of a December rate rise. Speaking at a banking conference in London, Bullard said that only a surprise would stop the Fed from tightening policy.

The dollar eased slightly however after the release of some soft US data. Producer prices in the US rose by less than expected in October. Excluding food and energy, producer prices were up 1.2% year-on-year in October, unchanged from the previous month and below estimates of 1.5%. Industrial output also disappointed as growth was flat in October, missing forecasts that it would grow by 0.2% month-on-month. The dollar retreated to around 109.20 yen in late European session, having earlier hit a 5½-month high of 109.75 yen.

The only other major data of the session came out of the UK from the latest labour market report. The unemployment rate in the UK fell from 4.9% to 4.8% in the three months to September – the lowest in 11 years. However, there were signs that employment growth was slowing following the Brexit vote as only 49,000 new jobs were added during the period, compared with 106,000 in the previous three months.

The claimant count also signalled a worsening labour market as the number rose for the third straight month, by 9.8k in October versus expectations of only a 2k increase. Meanwhile, wage growth remained muted, with average weekly earnings rising by 2.3% y/y in the three months to September, slightly below forecasts of 2.4%.

The pound fell after the data, though it had already come under pressure from earlier in the day. It hit a session high of 1.2502 dollars before dipping to 1.2408 dollars, but managed to firm slightly to around 1.2455 in late session.

The euro also remained pressured by the strong dollar, which pulled the single currency to an 11-month low of 1.0687 dollars before recovering to around the 1.07 level.

Commodity currencies did not fare much better as both the Australian and New Zealand dollars fell to multi-month lows. The aussie was earlier hit by weak wage growth numbers out of Australia and touched a 2-month low of 0.7459 versus the US dollar in late European trading. The bullish greenback also dragged the kiwi lower, which touched a 3½-month low of 0.7034.

Oil prices fell sharply on Wednesday due to profit taking following yesterday’s 6% rally. However, prices managed to pare their losses despite a bigger-than-expected build in US crude stocks according to the latest EIA inventories data. US crude stocks rose by 5.3 million in the week ending November 11 instead of 1.5 million as expected. WTI oil futures firmed to $45.70 a barrel after the data as investors focused on the upcoming OPEC meeting where an agreement to cut output is anticipated.

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