Dollar consolidates after strongest week in two years

The U.S. dollar paused near a seven-week high on Monday as investors reassessed their positions following last week's robust U.S. jobs data. Concerns that Middle East tensions might escalate into a broader conflict have also increased demand for safe-haven assets.

September's jobs report revealed the largest jump in nonfarm payrolls in six months, along with a decline in the unemployment rate and solid wage growth. These factors led markets to revise their expectations for future U.S. interest rate cuts. The Federal Reserve is now anticipated to cut rates by just 25 basis points (bps) in November, down from previous bets of 50 bps. According to CME's FedWatch tool, markets are pricing in an 85% chance of a quarter-point cut, compared to just 47% a week ago, with a slim 0.15% chance of no cut at all.

The yield on the benchmark U.S. 10-year note rose above 4% for the first time in two months, providing psychological support for the dollar.

Against the Japanese yen, the dollar weakened after Japan's top currency diplomat, Atsushi Mimura, issued a warning against speculative moves in the foreign exchange market. The dollar/yen pair fell 0.49% to 147.98, after hitting a high of 149.10 overnight, the highest level since August 15.

“The market became cautious as we approached the 150 mark on the yen, but I don’t think this is a major move yet,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

The dollar index, which measures the greenback against a basket of six major currencies, slipped 0.07% to 102.46, after rising to 102.69 on Friday, its highest level since mid-August. Last week, the dollar logged a gain of more than 2%, its largest in two years.

In the Middle East, Hezbollah fired rockets at Israel's third-largest city, Haifa, on Monday, as Israeli forces appeared ready to expand ground operations in southern Lebanon. This occurred on the anniversary of the Gaza war, which has fueled regional conflict.

The euro was nearly unchanged, down just 0.01% at $1.0975, after German industrial orders in August fell more than expected, indicating ongoing weakness in Europe’s largest economy. Overall, the sentiment remained dollar-positive, with safe-haven currencies like the yen, Swiss franc, and the U.S. dollar benefiting from the uncertain geopolitical landscape.

Brian Daingerfield, foreign exchange strategist at NatWest Markets in New York, noted that, “The dollar is generally stronger, but along with traditional safe havens like the yen and Swiss franc. That reflects some weakness in equities and a rise in oil prices as markets closely watch developments in the Middle East.”

The dollar weakened 0.45% against the Swiss franc to 0.854. The Canadian dollar also lost ground, falling 0.37% to 1.36 against the U.S. dollar. Sterling fell 0.25% to $1.3083, after recording its steepest decline since April last week, following comments from Bank of England Governor Andrew Bailey suggesting more aggressive rate cuts.

The Australian dollar and New Zealand dollar also weakened, with the Aussie down 0.6% and the kiwi down 0.63% against the U.S. dollar.

In the cryptocurrency space, Bitcoin rose 1.49% to $63,334.40, while Ethereum gained 1.13%, reaching $2,456.20.

Currency bid prices as of 7 October 03:26 p.m. EDT

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