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US Dollar Falls Despite Bullish Non Farm Payrolls and Improved Fed Rate Forecasts - What Gives?

Friday, 07 December 2007 18:55:01 GMT  |  David Rodriguez, Currency Analyst

The US dollar fell for the second consecutive trading day, as a lackluster domestic Non Farm Payrolls report allowed currency traders to sell the greenback against major forex counterparts. The monthly payrolls gain beat consensus forecasts at +94,000 through November, leaving the Unemployment rate unchanged at 4.7 percent. Yet a tepid reaction highlighted forex markets’ indifference to the release despite a sharp improvement in rate forecasts for the US dollar. A jump in US Treasury Bond Yields and implied rates on Federal Funds futures show that speculators have pulled back expectations for further Fed interest rate cuts. Forex traders’ indifference to the developments arguably bode poorly for short-term outlook on the US dollar, however, and the greenback looks to trade lower through the end-of-week close.

Highly-anticipated Non Farm Payrolls data failed to provide the sharp dollar volatility many had hoped for, and some claim that the official payrolls result proved underwhelming following an earlier-week ADP Employment release. Indeed, Wednesday’s ADP figures theoretically predicted a November Non Farm Payrolls gain in excess of 200,000 jobs, but the Bureau of Labor Statistics figures clearly failed to live up to such expectations.

Not all market participants were disappointed by the release, however; a rally in US bond yields showed reduced fears for the future of domestic economic growth. Such an improvement in sentiment likewise allowed for a boost in US Federal Reserve interest rate expectations. The December Fed Funds contract now shows an approximate 75 percent chance that the central bank will reduce its key short-term rate by 25 basis points—and not 50 basis points as some had feared. A more bullish outlook for US dollar interest rate differentials should have been enough to boost the currency, but forex traders have thus far shown little willingness to bid the greenback higher through end-of-week price action. 

Written by David Rodríguez, Currency Analyst for DailyFX.com

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