Dollar firm as US rates seen higher for longer; lira slides

The dollar firmed against major peers in Asian trading after a robust US jobs report spurred traders to price in higher interest rates for longer.

The Australian dollar erased early losses after a report showed a pick-up in services activity in key trading partner China. The yuan also initially got a boost, but then dropped back toward a six-month low.

Meanwhile, the Turkish lira dropped more than 1 percent, continuing its slide since President Tayyip Erdogan's re-election, despite the appointment of highly-regarded Mehmet Simsek as finance minister.

 

The US dollar garnered support from higher Treasury yields after data on Friday showed payrolls in the public and private sector increased by 339,000 in May, far outstripping the 190,000 forecast on average by economists polled by Reuters.

The US currency edged up 0.04 percent to 140.01 yen , as 10-year US Treasury yields climbed more than 3 basis points to 3.727 percent in Tokyo. The dollar rallied 0.84 percent against the yen on Friday.

The euro slipped 0.08 percent to $1.06995, extending the previous session's 0.51 percent slide.

 

While headline US jobs growth was much stronger than expected in May, wage pressures eased and the unemployment rate climbed off a 53-year low, potentially giving the Federal Reserve scope to pause their rate hiking campaign at the upcoming June 13-14 meeting, as some officials had voiced a preference for doing last week.

However, those bets simply shifted to July, and traders eased off on bets for rate cuts later in the year.

CME Group's FedWatch tool shows interest rate traders are laying 1-in-4 odds for a hike next week, down from 2-in-3 odds a week earlier. For July, markets put 70 percent odds for rates to be at least a quarter point above where they are currently.

"The market's feeling is if they skip June and the stock market keeps rallying, the Fed may have to hike possibly multiple times, not just once," said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo

 

"The dollar still has upside."

The Aussie was flat at $0.6606, recovering from early losses of as much as 0.25 percent, aided by new evidence of China's recovery from the pandemic. The private-sector Caixin/S&P Global services purchasing managers' index (PMI) rose to 57.1 in May from 56.4 in April - contrasting with the official PMI released last week that showed a slower pace of expansion.

The yuan, which had swung to gains after the data, weakened again as the European morning approached. The US dollar was 0.17 percent stronger at 7.1202 yuan in offshore trading , heading back towards the six-month high at 7.1404 from Thursday.

The Canadian dollar held its ground against its US counterpart amid a more than 1 percent rise in crude prices after Saudi Arabia announced its biggest production cut in years. The greenback was flat at C$1.3436, after touching a two-week low of C$1.3408 on Friday.

The Turkish lira dipped as low as 21.14 per dollar, approaching last week's record low of 21.80.

It is a rocky first reaction to the appointment of Simsek - who won market confidence during terms as finance minister and deputy prime minister between 2009 and 2018 - which hints that Erdogan's newly-elected government is moving away from unorthodox interest rate cuts in the face of high inflation that had undercut the currency.