Dollar falls after stronger labor market report, Fed minutes

NEW YORK, January 5, Reuters -- The dollar fell on Wednesday after a stronger than expected labor market report and ahead of minutes from the Federal Reserve's December meeting, as investors sought signs on when the central bank will hike interest rates.

In December, private payrolls jumped by 807,000 jobs, well above the expectation of 400,000 jobs, although climbing COVID 19 cases could slow the labor market's momentum.

The dollar had risen more than 2% since the end of October before Wednesday's decline, as expectations have grown that the Fed will begin to hike interest rates this year. Expectations for at least a 25 basis point hike by the central bank are over 60%, according to the CME FedWatch Tool.

FX, like equities, has seen safe havens really richen up, according to a broadbrush point of view. Colin Stewart, head of Americas at Quant Insight in New York, said that this is a part of the shift that is seeing out of the Fed in terms of a new pivot on policy and perhaps also uncertainty surrounding growth that could be related to putting the brakes on the economy and COVID.

In both asset classes, we are seeing bullish signals on emerging market FX versus developed market names and we are seeing bullish signals on growth currencies against safe havens. The strengthening of the dollar may have sparked some caution on Wednesday ahead of the release of the minutes, scheduled for release at 2 p.m. The central bank may be hiking rates at some point in the future, which could provide insight into how aggressive the central bank may be in hiking rates. Analysts pointed to the 96.40 mark as a technical level that is acting as resistance.

The dollar index fell 0.368%, with the euro up 0.43% to $1.1333.

On Tuesday, Minneapolis Federal Reserve Bank President Neel Kashkari said he expected the U.S. central bank to raise interest rates twice this year to address persistently high inflation, reversing his long-held view that rates would need to stay at zero until at least 2024.

Despite the rapid spread of the Omicron variant, investors have viewed it as unlikely to disrupt the global economy or take more aggressive actions by central banks, with studies showing lower hospitalization rates.

The Japanese yen increased by 0.31% against the dollar at 115.79 per dollar, while the dollar was trading at $1.3564, up 0.24% on the day.

The Bank of England will raise interest rates as soon as next month, as the Sterling hit a 2 month high against the dollar at 1.3566 per dollar, its highest since Nov. 9, on growing expectations that the Bank of England will raise interest rates as soon as next month.