NEW YORK: The dollar weakened on Friday after US labor data showed slower wage growth, suggesting inflation pressures are easing and could lead the Federal Reserve to more modest interest rate rises than previously expected.
The US economy added jobs at a brisk clip in February, but slower wage growth and a rise in the unemployment rate prompted financial markets to dial back expectations for a 50-basis point rate hike when Fed policymakers end a two-day meeting on March 22.
Average hourly earnings for all private workers rose 0.2% versus 0.3% in January, and lifted the year-on-year figure to 4.6%. Economists expected hourly earnings to rise 0.3% in February, which would have raised wages by 4.7% annually.
“Hiring was very strong, better than expected. But if you look under the hood, unemployment ticked higher and wages, the annual number accelerated, but not as much as expected,” said Joe Manimbo, senior market analyst at Convera in Washington.
The data not being as hot as the blowout jobs report for January has injected some uncertainty into the market as to whether the Fed really does need to go bigger at its meeting in two weeks, Manimbo said.
Fed funds futures showed a 41% chance of a 50 bps hike on March 22, compared to a 71.6% probability a week ago, according to CME’s FedWatch Tool.
“The market had gotten ahead of itself on the prospects of a 50 basis point hike at the next meeting,” said Dec Mullarkey, managing director of investment strategy and asset location at SLC Management in Boston.
“Rate hikes of 25 basis points at this point make more sense as it allows the Fed to keep tightening but extend the period over which they do it to allow the data to catch up,” he said.
Treasury yields fell, with the 10-year note down 23 basis points to 3.693% on the likelihood of a smaller rate hike, and reduced the appeal of an already strong dollar.
The dollar index fell 1.083%, while the euro rose 1.07% to $1.0693. Sterling was last trading at $1.2099, up 1.46% on the day.
The market will now focus on the “quite important” consumer price index scheduled for release on March 14, said Andrzej Skiba, head of the BlueBay US fixed income team at RBC Global Asset Management in New York.
“This is a small, but positive data point, suggesting that inflation remains elevated but the near-term pressures are not as acute as people feared,” Skiba said, referring to average hourly earnings.
Nonfarm payrolls increased by 311,000 jobs last month, the Labor Department’s closely watched employment report showed on Friday. Data for January was revised lower to show 504,000 jobs added instead of the previously reported 517,000.
Economists polled by Reuters had forecast job growth of 205,000. They say the economy needs to create 100,000 jobs per month to keep up with growth in the working-age population.
The Japanese yen strengthened 1.42% to 134.25 per dollar.
The dollar earlier jumped against the yen in a knee-jerk move after the Bank of Japan kept policy unchanged in Governor Haruhiko Kuroda’s last policy meeting before he steps down in April.
While the “no surprises” decision was expected by most market watchers, many see the days of the BOJ’s bond yield curve control (YCC) as numbered, which led to some pricing in a slim chance of a policy tweak at Kuroda’s last policy meeting.
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