The dollar strengthened on Thursday after unemployment claims pointed to a strong U.S. jobs market that along with other data showing growing labor costs indicates the Federal Reserve will keep interest rates higher for longer.
The yield on two-year Treasury notes , which are sensitive to interest rate expectations, shot to levels last seen in July 2007 at 4.944% as the market perceived the Fed will raise rates further to tame sticky inflation.
“There’s more and more of a concern that incoming data is revealing that the Fed might be a little bit behind the curve than maybe they expected heading into this year,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto.
“We’ve got two-year yields at levels we haven’t seen in 15 or 16 years. That’s an obvious reason why the dollar is outperforming,” he said.
The number of Americans filing new claims for unemployment fell again last week, pointing to a still strong jobs market. Another Labor Department report showed labor costs grew much faster than previously estimated in the fourth quarter.
Futures pricing edged higher, with a peak rate climbing on Thursday to 5.493% in the Fed funds by September.
The euro slid on data that showed inflation in the euro zone was not as high as investors had feared but remains elevated. Inflation eased to 8.5% from 8.6% in January on lower energy prices.
The dollar index , a basket of major trading currencies, rose 0.469%, while the euro fell 0.5% to $1.0612.
The market’s reaction to the euro zone data was initially muted following the euro’s 0.9% against the dollar on Wednesday, its biggest daily jump in a month, after data that showed prices in Germany rose more than hoped last month.
The hotter-than-expected German inflation in February came after unexpectedly strong readings in France and Spain, reinforcing the case for the European Central Bank to keep raising interest rates.
Investors now see the ECB’s 2.5% deposit rate rising by a combined 100 basis points in March and May, then to around 4.1% at the turn of the year. Markets have priced in an extra 50 basis points of hikes in just the past month.
Policymakers were split in February on the type of signal they should send about the ECB’s next rate move, accounts of the central bank’s meeting on Feb. 2 showed on Thursday.
Sterling was held back by remarks from Bank of England Governor Andrew Bailey, who said “nothing is decided” on future rate increases, which had traders trimming back bets on higher rates. Sterling traded at $1.1954, down 0.64% on the day.
The Japanese yen weakened 0.35%, while the Australian and New Zealand dollars moved lower after strong gains on Wednesday driven by Chinese manufacturing data.
The offshore Chinese yuan rose 0.59% to $6.9192 per dollar.
Investors are looking ahead to China’s National People’s Congress meeting, which begins on Sunday, for guidance on policy support for the post-COVID recovery.
Bitcoin fell 1.27% to $23,335.00 after shares of Silvergate Capital Corp (SI.N) nearly halved when the crypto-focused bank delayed its annual report and said it had sold additional debt securities.
