Dollar jumps as wage growth spurs hawkish Fed bets

The dollar jumped on Friday after data showed that U.S. employers added more jobs than expected in November while average hourly earnings also increased, potentially giving the Federal Reserve more incentive to raise interest rates.

Employers added 263,000 jobs in November, well above estimates of 200,000. Average hourly earnings jumped by 0.6% in the month, above expectations for a 0.3% gain.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said that markets reacted to the hourly earnings data and the participation rate, which declined to 62.1%.

"Both of those measures reflect more than the nonfarm payroll growth number the tightness of the labor market," he said.

The dollar index DXY was last up 0.38% on the day against a basket of currencies at 105.04, though the greenback slipped 0.04% on the day against the Japanese yen USDJPY to 135.26. The euro EURUSD dropped 0.44% on the day to $1.0479.

"Stronger-than-expected hiring can buy the Fed more time to stay aggressive," Joe Manimbo, senior market analyst at Convera in Washington, said. "The dollar is catching twin tailwinds as yields rise and risk aversion returns as the jobs report casts doubt on a soft landing."

The greenback had tumbled on hopes that the Fed was closer to the end of its tightening cycle after Fed Chairman Jerome Powell said on Wednesday that it was time to slow rate hikes, noting that "slowing down at this point is a good way to balance the risks."

Data on Thursday also showed that inflation is moderating, with the the personal consumption expenditures (PCE) price index rising 0.3% after advancing by the same margin in September. In the 12 months through October, the PCE price index increased 6.0% after advancing 6.3% in September.

"Markets are really buying into the pivot story from the Fed," ING FX strategist Francesco Pesole said.

But Friday's data could pause the bearish trend, especially as the move against the greenback looks stretched in the near-term.

"The short-term momentum indicators were oversold for the dollar," Chandler said.

The next major U.S. economic indicator will be consumer price inflation data due on Dec. 13, one day before the Fed concludes its two-day meeting on Dec. 14.

The U.S. central bank is expected to increase rates by an additional 50 basis points at the meeting. Fed funds futures traders are now pricing for the Fed's benchmark rate to peak at 4.96% in May. (FEDWATCH)

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Currency bid prices at 9:22AM (1422 GMT)