The dollar soared after a surge in U.S. hiring bolstered the case for the Federal Reserve to raise interest rates next month.

The currency advanced to its strongest since April versus the euro and its highest in more than two months versus the yen after a Labor Department report showed the U.S. added the most workers in almost a year last month, beating all forecasts. Bloomberg’s gauge of the greenback advanced to its highest in data going back to January 2005.

“Very impressive,” Fabian Eliasson, head of U.S. corporate foreign-exchange sales in New York at Mizuho Financial Group Inc, said of the report. “This obviously supports a sooner-rather-than-later rate hike, and that would obviously be very supportive of the dollar.”

The dollar strengthened 1.4 percent to $1.0730 per euro as of 9:53 a.m. in New York, touching its highest since April 23. It added 1.1 percent to 122.89 yen.

The Bloomberg Dollar Spot Index rose 1 percent to 1,231.50, after touching 1233.44. The dollar gained against all 10 of its major peers.

Traders boosted bets that the Fed will raise rates next month after the labor report. There’s a 70 percent probability that the central bank will raise its benchmark rate at its December meeting, according to futures data compiled by Bloomberg, up from 56 percent before the report’s release. The calculation assumes the effective fed funds rate averages 0.375 percent after the first increase.

Labor Department data showed U.S. payrolls increased by 271,000 in October, versus estimates for a gain of 185,000 in a Bloomberg survey of economists. The jobless rate fell to 5 percent, the lowest since April 2008, while average hourly earnings climbed from a year earlier by the most since July 2009.

David Fuller's view

The Fed has been hoping to make its first interest rate hike in 2015: 1) because the US economy has been showing signs of recovery; 2) 2016 is a US presidential election year.  These are obviously politically sensitive and rate hikes in the latter months of the presidential campaign as the economy is strengthening, or conversely, a reluctance to lower rates in an election year when the economy is soft, can be contentious for the party in office. 

President Jimmy Carter cited Paul Volker’s rate hikes in 1980 as a factor in his subsequent loss to Ronald Reagan that year.  Alan Greenspan’s reluctance to cut rates in 1992 was seen by President George Bush Sr. as a reason for his loss to Bill Clinton.  Accordingly, I maintain that the Fed will make its first rate hike in December, and it has little reason not to given the latest US jobs report released today.

There is also a currently small possibility that the Fed will make a second quarter-point rate hike in March 2016.  Thereafter, the Central Bank would hope that a third hike before yearend was unnecessary. That may depend on commodity prices, which are dormant at depressed levels today but would certainly rebound if the world’s five largest economies are in the process of strengthening reasonably simultaneously over the next year or two.  

Conversely, if the global economy remained soft the Fed would be wary of a too strong Dollar, which would be a headwind for the US economy.  It would also be a potential problem for emerging markets which borrowed heavily in USD at low interest rates, before the greenback’s strong rally commencing in December 2014. 

(See also: Ambrose Evans-Pritchard’s article: I will Eat My Hat If We Are Anywhere Near A Global Recession, posted on Thursday 5^th November)