Written by US jobs data allows the Fed to take the sidelines
The US dollar gained against all its peers on Friday, after the US employment report for December suggested that the labor market is not slowing fast enough to warrant another rate cut by the Fed in the next couple of months.
Nonfarm payrolls increased by 50k in December from a downwardly revised 56k in November, while economists had forecasted a gain of 60k from a previously reported increase of 64k for November. However, the unemployment rate slipped to 4.4% from a downwardly revised 4.5% and average hourly earnings accelerated to 3.8% y/y from 3.6%, suggesting that there is no rush for the Fed to cut rates again soon.
Fed Chair Powell under criminal investigation
However, the dollar came under pressure today after the US Department of Justice opened a criminal investigation into Fed Chair Jerome Powell regarding the renovation of the Federal Reserve buildings, heightening tensions between the US administration and the central bank.
Powell said that the threats are a “pretext”, aimed at putting extra pressure on the Fed to lower interest rates more aggressively. “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President," the Fed Chair noted.
Although the US dollar fell against all its major counterparts today, expectations about the Fed’s course of action have not been affected much. Investors continue to pencil in around 53bps worth of rate cuts by December, with the next 25bps reduction fully baked into the cake for June.
Perhaps investors do not believe that the charges will impact Powell’s credibility and/or they are holding a cautious stance until President Trump announces his pick for the new Fed Chair. For now, combined with the slide in US stock futures, the dollar’s retreat points to concerns about another round of sell America, though yields have not rallied, at least not yet.
Yen falls as Takaichi considers snap election
The currency that lost the most ground against the dollar on Friday was the yen, with dollar/yen hitting a new yearly high of 158.20 during the Asia session today, before pulling back.
The Japanese currency weakened following reports that PM Sanae Takaichi is planning to call a snap election in February to widen her ruling coalition’s majority in the lower house. With an approval rating of around 70%, she may be confident about a victory that will allow her to proceed more freely with her spending plans, which would add to the already ballooned government debt.
This would probably drive yields higher and further weaken the yen. That said, the yen could stay under pressure even before the election as this means the BoJ’s hands are tied before the event. So, in the best-case scenario, the next rate hike by the central bank may be delivered after the spring wage negotiations, and only if the negotiations result in satisfying increases in salaries.
Nonetheless, with dollar/yen getting closer to the psychological zone of 160.00 again, intervention warnings from the finance ministry may resurface, and if they don’t have any effect, actual action may be possible. In the recent past, Finance Minister Katayama has repeatedly warned about action, highlighting the risk that a weaker yen could feed inflation through higher import costs.
Stock futures slip, gold hits record high on Trump-Powell feud
All three of Wall Street’s main indices closed in positive territory on Friday, with the S&P 500 hitting a fresh record high. That was likely due to the not-so-bad employment report, which implies strong economic growth during the last quarter of 2025, corroborating the notion that the Fed does not need to enter panic mode and cut interest rates aggressively.
However, stock futures today are in the red due to the flareup in tension between the White House and the Fed, pointing to potential investor concerns that should the US President continue to undermine the central bank’s independence, another sell-off of US assets could be possible soon.
Gold rebounded strongly following the news about potential criminal charges against Fed Chair Powell, hitting a new record high fractionally above the $4,600 zone.
Oil prices extended their gains on Friday, retreating only slightly today. It seems that investors are still calculating the risk of supply shortages from escalating turmoil in Iran, where more than 500 people have been killed during protests according to reports.
Nonetheless, the rebound was capped by headlines regarding Venezuela, where the US said that sanctions against the nation could be lifted as early as this week.
By XM.com
