Key Takeaways:
The greenback is closing at its strongest in two months as traders price in a higher-for-longer Fed ahead of Friday's jobs report.
The dollar climbed to its highest close in eight weeks as stronger economic data and persistent inflation emboldened bets the Federal Reserve will keep rates elevated, with Friday's payrolls report set to test the rally.
"The Beige Book confirms an economy that is feeling the strain of higher energy costs, but it still has enough momentum to keep the Fed on hold," said Nancy Vanden Houten, economist at Oxford Economics.
The ICE US Dollar Index hovered near 99.05, little changed on the session but holding gains from a three-day advance that pushed it to levels not seen since early April. The 10-year Treasury yield fell to 4.43% and the 2-year slipped to 4.02%, paring some of the week's earlier climb as oil pulled back from recent highs. Brent crude eased to around $97 a barrel after President Donald Trump said Iran negotiations were continuing, easing some supply disruption fears.
The stakes for Friday's nonfarm payrolls report are unusually high. Economists expect 85,000 jobs were added in May with the unemployment rate holding at 4.3%. A miss would be the first crack in the higher-for-longer narrative that has supported the dollar this week. A beat would reinforce the case for no rate cuts — or even a hike — and could push the dollar toward its March highs.
The Fed's preferred inflation gauge, the core PCE price index, rose to 3.8% in April from 3.5% in March, extending a run of sticky readings that have kept the central bank on the sidelines. The federal funds rate has stayed in the 3.50% to 3.75% range all year after the Fed cut rates last autumn in response to what looked like a softening labor market.
Dallas Fed President Lorie Logan said Monday that a rate hike may be needed to bring inflation under control, becoming the first policymaker to publicly float that option since the current tightening cycle. Her comments amplified the shift in tone across the Federal Open Market Committee, where the consensus has moved from expecting a cut later this year to preparing for an extended hold.
The Fed's Beige Book, released Wednesday, showed that energy-related costs tied to the conflict in the Middle East were the primary driver of inflationary pressures, with spillovers into shipping, packaging, groceries and fertilizer. Nine of the 12 regional banks cited AI data center construction as a bright spot for investment and labor demand, even as consumer-facing sectors showed signs of strain.
Friday's employment report will be the first major data release since Kevin Warsh took over as Fed chairman in late May. President Donald Trump picked Warsh on the expectation he would cut rates but has backed off that demand as gasoline prices surged.
The JOLTS job openings data, due earlier in the week, will set the tone ahead of the payroll number. Job openings posted their largest increase in five years during April, according to the prior month's report, suggesting labor demand remains resilient despite elevated borrowing costs.
A strong payroll print would validate the dollar's recent gains and could push the DXY toward the 100 level, a threshold not tested since March. A weak number would reverse the dollar's three-day advance and give gold and risk assets room to recover. Gold found support Tuesday at $4,463 an ounce, holding above the bull-bear line at $4,481.78 that traders are watching as the dividing line between the uptrend and a deeper correction.
The dollar's fate this week hinges on whether the data confirms the economy is running hot enough to keep the Fed on hold — or reveals cracks that bring rate cuts back into the conversation.
This article is for informational purposes only and does not constitute investment advice.
