Dollar Gains Ahead of Key Payrolls Release; Middle East Turmoil Contributes

The U.S. dollar experienced a rise on Thursday, buoyed by strong employment data and the uncertainty stemming from turmoil in the Middle East.

As of 04:30 ET (08:30 GMT), the Dollar Index, which measures the value of the dollar against a basket of six other currencies, was up 0.2% at 101.597, approaching its recent three-week peak.

### Strong Labor Market Data Boosts Dollar

The dollar’s upward momentum was supported by Wednesday’s ADP private payrolls report, which indicated an unexpected increase of 143,000 jobs in the U.S. last month. This came on the heels of Tuesday’s more favorable-than-expected data on U.S. job openings, raising optimism for a solid nonfarm payrolls report on Friday. A strong report could lead to a shift in market expectations regarding the pace of Federal Reserve easing.

Analysts at ING noted, “The pricing for year-end Fed funds continues to largely embed a 50 basis point cut in either November or December, meaning there is potential for further alignment with the Fed’s less dovish rhetoric and consequently upside risks for the dollar.” They also observed that the threshold for a negative dollar reaction to U.S. data appears to be higher following Fed Chair Jerome Powell’s recent opposition to 50 basis point cuts.

Currently, the market estimates the probability of another 50 basis-point U.S. rate cut on November 7 at around 37%, following the Fed’s significant rate reduction last month. Additionally, the dollar serves as a safe-haven asset amidst rising tensions in the Middle East, particularly after Iran launched a ballistic missile attack on Israel.

### Euro Weakens on Cooling Inflation

In Europe, the euro was trading down 0.1% at 1.1035, nearing a three-week low due to further evidence of slowing inflation in the eurozone. Despite slightly better-than-expected activity data for September, the composite data for the region remained in contraction territory.

Notably, European Central Bank policymaker Isabel Schnabel, known for her typically hawkish stance, dropped her persistent warnings about the challenges of controlling price growth in a recent speech. This has heightened expectations for another interest rate cut later this month.

Moreover, GBP/USD fell by 1% to 1.3133, hitting a two-week low after Bank of England Governor Andrew Bailey mentioned that the central bank may adopt a “more activist” approach regarding rate cuts if inflation data continues to improve.

### Yen Falls to Six-Week Low

The USD/JPY pair increased by 0.1% to 146.53, reaching a six-week high after Japan’s new prime minister expressed caution regarding the need for further interest rate hikes in discussions with the central bank governor. Additionally, the minutes from the Bank of Japan’s July meeting, released earlier this week, revealed a division among policymakers on the timing of future interest rate increases.

Meanwhile, USD/CNY remained steady at 7.0185, with Chinese markets closed until Tuesday for the Golden Week celebrations.