Dollar Climbs to Highest Level in 20 Years; Payrolls Eyed

The U.S. dollar soared in early European trade Friday, climbing to its highest level in two decades ahead of the release of the closely watched monthly U.S. jobs report which could pave the wave for further monetary policy tightening.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, gained 0.2% to 104.040, the first time the index has broken 104 in 20 years.

The U.S. Federal Reserve announced a 50 basis point hike, its largest increase since 2000, on Wednesday, and although Chairman Jerome Powell indicated that the policymakers weren’t actively considering more substantial moves in the future the market is less sure.

“A sustained decline in the dollar would require confidence that the Fed can deliver an orderly tightening cycle, taking the steam out of the U.S. economy and delivering a soft landing,” said analysts at ING, in a note.

“It seems far too early to make that call given the lingering fears of inflation and the risks – as we have seen over the last 12 months – that the Fed cycle is re-priced even higher.”

Traders are now focusing on the release of the April nonfarm payrolls report, with economists predicting around 400,000 jobs were added last month, a solid report that wouldn’t undermine the case for aggressive monetary policy tightening given inflation is running at levels not seen for four decades.

This stance by the Fed is putting pressure on other central banks, with the head of Germany’s Ifo institute stating Friday that the European Central Bank must quickly raise interest rates in line with the United States, given the high inflation in the Eurozone.

This follows ECB board member Fabio Panetta, a renowned dove, acknowledging in a newspaper interview on Thursday that neither negative interest rates nor quantitative easing are appropriate right now.

However, EUR/USD fell 0.4% to 1.0494, keeping marginally above last week’s five-year low of 1.0469.

“Challenges both in Europe and China create many headwinds for the pro-cyclical euro,” added ING. “The balance of risks suggests it is hard to make the case for a meaningful EUR/USD rally.”

The Bank of England also hiked its benchmark interest rate by 25 basis points on Thursday, its fourth consecutive meeting with such a move. Yet, GBP/USD plunged over 2%, the biggest daily fall since 2020, after the central bank warned that the economy was at risk of recession, and the pair is currently down a further 0.6% to 1.2294.

Elsewhere, USD/JPY rose 0.3% to 130.56, taking it closer to last week’s 20-year top of 131.25, while AUD/USD fell 0.5% to 0.7072, bucking the trend for the week after the Australian central bank raised rates by more than expected and signaled further moves ahead.

USD/CNY traded 0.4% higher to 6.6819, near an 18-month high, after China’s top leaders firmly backed the country’s COVID-Zero strategy, suggesting strict COVID lockdowns are likely to stay for the foreseeable future, potentially hampering efforts to boost economic growth.