Traders around the world are selling the U.S. dollar even after a better-than-forecast U.S. jobs report, with U.S. government bond yields also heading south. Those stereotypical comments that a depreciation in the dollar can be attributed to "profit-taking" are definitely not the case this time, as there are other underlying causes moving the prices.
Nonfarm payrolls increased by 263,000 last month, well above the average 213,000 seen over the past five years. Meanwhile, the unemployment rate dropped further, hitting its lowest level since 1969 at 3.6 percent. However, the market reaction after the jobs report confused many investors. The dollar index quickly surged above 98 upon the release of the strong labor report, but it immediately retreated after a short-run rally. The yield on the U.S. Treasuries market showed a similar pattern.
Many market participants would have expected the dollar and Treasury yield to rise after the data release, and the solid jobs report lifted the Citi Surprised Index to its highest level in a month. However, there are various valid reasons that induced traders to dump the dollar, despite the jobs report showing that the U.S. economy is still expanding.
Sluggish inflation outlook, a key parameter of the Fed's policy, lies underneath the robust jobs report
Many sectors, including healthcare and construction, posted gains. However, retail employment fell by 12,000, a third consecutive month of decline, suggesting signs of deceleration in personal consumption, potentially threatening the outlook for inflation. The chart below shows that U.S. core PCE growth on a year-on-year basis has been moving in tandem with the number of jobs in retail sectors.
Wage growth remained at 3.2 percent, showing no change despite an accelerating uptick in jobs creation. Usually, a tighter labor market would cause business owners to increase workers' salaries at a faster pace. In Friday's report, stagnant wage growth along with the acceleration in payrolls signals that many of the current jobs created are lower-paid positions, which is weighing down on spending power.
Not all of the economic data is pointing to a solid recovery in the U.S. labor market
After the U.S. jobs report, another set of data showed that ISM service PMI for April fell to its lowest level since August 2007, with its employment sub-index sliding to its lowest level in two years. The decline in the ISM employment index was in total contrast to the image painted by nonfarm payrolls, suggesting the recovery in the U.S. labor market remains uncertain.
The Fed's Chicago President Charles Evans said Friday that the risk underlying inflation may be stuck below the central bank's two percent target, and core inflation has retreated to relatively low levels over the past three months, elevating his concerns over the outlook for inflation. Although Fed Chief Jerome Powell pushed back against some views on rate cuts a few days ago at the FOMC meeting, the threshold on another rate hike to lift the benchmark rate to 2.75 percent is high.
Dollar's status as a safe-haven may start lightening as global recession fears ease
The dollar index still managed to gain over 1.2 percent since the end of last year despite having a more dovish Fed, and one of the major reasons behind its strength is the earlier global recession fears. The sluggish growth outlook triggered several major central banks to slash their growth forecasts, and that made the dollar gain the status as a safe-haven. Traders have since been selling currencies like the euro, Turkish lira and South Korean won as a bet on those central banks easing monetary policy and buying the dollar.
Now, with a robust U.S. jobs report, together with improving Chinese economic data, "recession fears" are largely easing, and the dollar's status as a safe haven may start lifting. Investors may also start to pick up those emerging-market currencies which offer higher interest rates.
The author Jimmy Zhu is chief strategist at Fullerton Research.
