The U.S. dollar rallied strongly on Friday, marking one of its best weekly performances in months, after a surprisingly solid employment report defied expectations and rekindled optimism about the strength of the American economy. The report significantly dampened hopes of an imminent interest rate cut by the Federal Reserve, prompting a global shift toward dollar-denominated assets.
According to the U.S. Department of Labor, non-farm payrolls increased by 139,000 in May, beating economists’ forecasts of around 120,000. Despite continued concerns about inflation and global slowdown risks, the unemployment rate remained steady at 4.2%, and average hourly earnings rose 3.9% year-over-year, a sign that wage pressures persist.
The positive data painted a picture of a labor market that remains resilient despite aggressive tightening by the Fed over the past two years. Markets responded swiftly: the U.S. Dollar Index (DXY) rose to 104.85, its highest level in over two weeks, while the EUR/USD pair dipped below 1.1400, and USD/JPY climbed past 151.20, signaling broad-based dollar strength.
“Markets were pricing in at least one rate cut by September, but this report changes the calculus,” said Erica Lin, Chief Global Strategist at NorthBridge Capital. “The Fed now has stronger justification to hold rates steady, or at the very least, delay any easing until inflationary pressures cool further.”
The shift in rate expectations has also pushed Treasury yields higher. The 10-year yield rose to 4.57%, the highest since mid-May, putting further upward pressure on the dollar as global investors chase higher returns in the U.S. fixed income market.
Meanwhile, in emerging markets, the stronger dollar sparked renewed caution. Currencies like the Brazilian real and South African rand saw slight pullbacks, reflecting growing concern over capital outflows and rising debt servicing costs in dollar terms.
🧭 What’s Next for the Fed?
Although the Federal Reserve has signaled it would be data-dependent, Friday’s job report complicates the picture. Core inflation remains sticky, and the Fed’s preferred gauge — the core PCE index — still shows elevated levels above the 2% target. With wage growth persisting and the labor market showing few signs of cooling, analysts say the Fed is now more likely to keep rates on hold through the end of Q3.
Adding to the complexity is political pressure. Former President Donald Trump, who is running for re-election, recently urged the Fed to cut rates by 1%, claiming it would “unleash American growth.” However, the current economic data may give the central bank enough cover to remain firm and resist political influence.
🌍 Global Repercussions
The dollar’s strength is being felt worldwide. In Europe, the euro is struggling to hold support amid slowing industrial production and political uncertainty ahead of EU elections. In Asia, currencies like the Korean won and Indian rupee have shown mixed responses — the latter gaining slightly due to a rate cut by the Reserve Bank of India, which buoyed local equities but may add longer-term pressure.
Traders are now eyeing upcoming U.S. CPI data, due next week, as the next major catalyst for currency markets. A hot inflation print could extend the dollar’s gains, while a surprise miss may rekindle dovish sentiment.
Conclusion:
For now, the U.S. dollar appears to be in the driver’s seat, backed by strong economic fundamentals and delayed easing expectations. With macro uncertainty and geopolitical tensions still lurking, the greenback’s role as a global safe haven remains firmly intact.
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