Payroll growth favours taper, boosts dollar

The US dollar surged to a six-week high against the Japanese yen today, after non-farm payrolls grew faster than expected, tipping the scales of probability towards another reduction in stimulus at the next FOMC meeting.

The US Labor Department’s announcement today that 175,000 jobs were created last month, a result that comfortably exceeded the consensus estimate of 150,000.

There have been some quite reasonable fears over how much of a drag on the economy the recent bad weather in the US will prove to be, and this in turn led to some speculation that if we saw enough weakness, the Fed might consider holding off from another reduction in the pace of its asset purchases at the forthcoming FOMC meeting.

Today's bounce in payroll growth suggests the Fed’s outlook for the economy is unlikely to be changed for the long term though.

This is backed up by comments made yesterday and today by William Dudley, the President of the New York Fed and the vice-chairman of the FOMC. He said that he expects slower growth in the first quarter of this year on account of the weather, but his long-term forecast remains at around 3%.

As stimulus tends to debase a currency, expectations that the Fed will plough on reducing its QE programme has been supportive for the dollar. USD/JPY climbed 0.27% to 103.40 by mid-afternoon in New York, hitting its highest level since January.

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