Euro slides below $1.16 as US jobs surge fuels dollar rally

The dollar climbed to a four-week high Friday after the US added 172,000 jobs in May, more than double the consensus estimate, sending the euro below $1.16 and the yen through the 160-per-dollar threshold.

"The bar to a Fed change is very high, and I don't think this cuts it," said Marc Chandler, chief market strategist at Bannockburn Global Forex. "I still think there's a good chance of a hike before the end of the year."

Nonfarm payrolls increased by 172,000 last month, the Labor Department reported Friday, far exceeding the 85,000 forecast in a Reuters poll and accelerating from a revised 115,000 gain in April. EUR/USD fell 0.29 percent to $1.1575, while the yen weakened 0.05 percent to 160.115 per dollar — a level that has previously triggered intervention by Japanese authorities. The dollar index rose about 0.4 percent on the week and 1.3 percent over the past month.

The data reinforces expectations that the Federal Reserve will keep rates at 5.25 percent to 5.50 percent at its June 17 meeting, with money markets now pricing close to 30 basis points of tightening this year and 50 basis points by the second quarter of 2027. The repricing has broad implications for currency markets, commodity prices and emerging-market assets as higher-for-longer US rates drain liquidity from riskier corners of the global financial system.

The jobs report landed as the European Central Bank prepares to raise its deposit rate by 25 basis points to 2.25 percent on Thursday, a move that may provide only temporary support for the euro. The single currency has fallen more than 3 percent against the dollar over the past month as the US economy's resilience contrasts with stagnation risks in the euro zone, where elevated energy costs are weighing on activity.

"From a euro perspective, the perpetuation of elevated energy prices remains a drag on activity there," said Jeremy Stretch, head of G10 FX at CIBC Capital Markets.

The yen's slide through 160 drew an immediate warning from Finance Minister Satsuki Katayama, who said Japan was ready to take "decisive action" against excessive volatility. The Bank of Japan is widely expected to raise interest rates this month, with money markets also pricing a second hike by year-end. The last time USD/JPY traded above 160 in late April, Tokyo intervened with an estimated 6 trillion yen in purchases, temporarily driving the pair back below 155.

Gulf Tensions Add to Dollar Demand

The dollar's rally has been strengthened by safe-haven flows as hostilities between Iran and Israel keep Brent crude above $90 a barrel. Peace talks between Washington and Tehran remain at a stalemate, with Iran making a ceasefire between Israel and Hezbollah a condition for any broader deal. The Strait of Hormuz disruption has raised energy import costs for the euro zone, Japan and China, further supporting the dollar's yield advantage.

"It's back to square one as far as the resumption of peace negotiations between the US and Iran is concerned," said David Morrison, senior market analyst at Trade Nation. "But investors have chosen to look past the current hostilities on the assumption that the war will soon end."

The dollar's strength has also weighed on risk assets. Bitcoin fell 3.74 percent to $61,211, heading for a 15 percent weekly decline — its lowest since February. The tech-heavy Nasdaq has come under pressure as investors reposition ahead of a $75 billion to $85 billion SpaceX initial public offering expected Friday, adding to supply indigestion after Alphabet's $85 billion equity raise.

If the May consumer price index, due Wednesday, shows headline inflation pushing through 4 percent year-on-year as economists expect, the case for a hawkish Fed hold at the June meeting will strengthen further. That scenario would keep EUR/USD under pressure toward the 1.14-1.15 support zone, with outside risk to 1.32 for cable, according to ING strategists.

This article is for informational purposes only and does not constitute investment advice.