Strong jobs report propels dollar to best week since 2022

By Karen Brettell

NEW YORK (Reuters) -The dollar jumped to a seven-week high on Friday and was on track to post its best week since September 2022 after a surprisingly strong jobs report for September led traders to cut bets that the Federal Reserve will make further 50-basis-point rate cuts.

The greenback was also set for its best weekly percentage performance against the Japanese yen since 2009 as traders adjusting for a less dovish Fed and a more dovish Bank of Japan sparked a rapid repricing in the currency pair.

U.S. nonfarm payrolls increased by 254,000 jobs last month, beating the 140,000 new jobs that economists polled by Reuters had anticipated.

The unemployment rate also unexpectedly slipped, to 4.1% from 4.2% in August.

It is a "blockbuster payrolls report by any measure. I think a no-landing scenario for the U.S. economy has suddenly become far more plausible," said Karl Schamotta, chief market strategist at Corpay in Toronto.

"The expectation now would be for a Federal Reserve that treads far more cautiously in easing policy,” Schamotta said.

Improving economic data and more hawkish comments from Fed Chair Jerome Powell on Monday, when he pushed back against expectations of continuing hefty rate cuts, led traders to reduce bets on a 50-basis-point reduction at the Fed's next meeting, on Nov. 6-7.

Those odds were completely wiped out after Friday's data. Traders are now pricing in no chance of a 50-basis-point rate cut, down from around 31% earlier on Friday and 53% a week ago, the CME Group's FedWatch Tool shows. A 25-basis-point reduction is seen as almost certain, with traders also seeing a small chance that the Fed will leave rates unchanged.

Bank of America expects the Fed to cut rates by 25 basis points per meeting through March 2025, followed by reductions of 25 basis points each quarter until the end of 2025, BofA US economist Aditya Bhave said in a report on Friday.

"The data flow since the Fed's decision to cut by 50bp in September has been remarkably positive," he said, calling Friday's report "A-plus."

Chicago Fed President Austan Goolsbee called the data "superb" and said more labor market data along those lines would boost his confidence the economy is at full employment with low inflation.

The dollar index reached 102.69, the highest level since Aug. 16, and was on track for its best weekly percentage gain since September 2022.

The euro slipped to $1.09515, the lowest since Aug. 15.

The dollar gained to 149.02 yen, the highest since Aug. 16.

New Japanese premier Shigeru Ishiba stunned markets this week when he said the economy was not ready for further rate hikes, an apparent about-face from his previous support for the Bank of Japan's unwinding decades of extreme monetary stimulus.

The dollar has also been boosted this week by safe-haven demand on concerns about widening conflict in the Middle East.

Supreme Leader Ayatollah Ali Khamenei said on Friday that Iran and its regional allies will not back down. Iran raised the stakes when it fired missiles at Israel on Tuesday, partly in retaliation for Israel's killing of Hezbollah secretary general Sayyed Hassan Nasrallah.

Sterling fell as low as $1.3070, the lowest level since Sept. 12.

Bank of England chief economist Huw Pill said on Friday the British central bank should move only gradually with cutting interest rates, a day after the pound slumped 1% after Governor Andrew Bailey said the BoE could move more aggressively to lower rates.

In cryptocurrencies bitcoin rose 1.95% to $61,958.

(Reporting by Karen Brettell; additional reporting by Medha Singh and Ankur Banerjee; editing by Mark Heinrich, Susan Fenton and Leslie Adler)