Dollar Extends Gains, Hitting Highest Since 2020 After Jobs Beat

(Bloomberg) -- The dollar extended its gains, hitting the highest against the euro in nearly two years, after stronger-than-expected U.S. job growth added momentum to existing haven demand for the currency.

A gauge of the greenback's strength climbed to a session high after data showed that the U.S. economy added 678,000 jobs last month, compared with a median estimate of 423,000. The index is holding at the highest level since July 2020, with reports of Russian forces shelling a Ukrainian nuclear facility sparking a run to the dollar's safety earlier in the day.

U.S. Treasuries also continued to rally, sending the yield on 10-year notes down about 10 basis points to 1.74%. The market's expectations for a Federal Reserve hike in March dipped slightly after the release, but swaps were still pricing in nearly a full quarter-percentage-point increase in the benchmark rate at the next meeting.

Valentin Marinov, head of G-10 FX strategy at Credit Agricole SA, said he doubted Friday's jobs numbers would alter the calculus for Fed policy making and that for now “all eyes remain on Ukraine.”

“The escalating conflict there could keep EUR/USD under pressure and thus support the USD complex,” he wrote.

The euro added to earlier losses and fell to its lowest level against the dollar since May 2020. The common currency fell to as low as $1.0886 as traders weighed the impact of Russian sanctions on the European economy, with the euro approaching a key support level that goes back to its inception in 1999.

Euro Traders Prepare for Test of Key Support in Place Since 1999

Since topping $1.23 in early 2021, the euro has struggled against the dollar as the Fed prepares for a tightening cycle that is expected to widen the rates gap between it and the European Central Bank. Geopolitical risks from Russia's invasion of Ukraine has also fueled a shift into the greenback, with Europe's economy more exposed to Russian sanctions. The currency's plunge risks stoking inflationary pressures in the region, triggering some speculation of ECB intervention in the market.

“Europe has become the focal point of the stagflationary and geopolitical angst in the markets and the euro could remain the pressure valve for these investor fears,” Marinov said.

Verbal Intervention?

ECB officials meeting next week may have to weigh the potential of slowing growth against surging energy and food prices. Germany's 10-year yield adjusted for inflation headed on Friday for its lowest close on record after data this week showed euro-area price gains quickened to an all-time high in February.

Traders Bet on Europe Inflation Jump, But No Guarantee on Hikes

“When inflation is getting worse by the month, refuting the notion that it's transitory, a falling euro exacerbates the problem and will most likely be a factor for monetary authorities,” said Audrey Childe-Freeman, Bloomberg Intelligence's chief G-10 currency strategist. “Unless the decline turned excessive, we believe unilateral ECB FX intervention is unlikely, yet this doesn't preclude verbal intervention.”

The euro's weakness comes as the Czech and Polish central banks intervened to prop up their respective currencies. While east European economies are among the worst hit by the crisis, the region's central banks have amassed hefty international reserves, led by the Czechs, which have enough to cover more than a year of imports.

Czechs Intervene to Prop Up Currency, Joining Regional Push

Euro options show traders are rushing to hedge against low-probability outcomes, according to a Europe-based trader familiar with the transactions who asked not to be identified because they aren't authorized to speak publicly.

Traders are paying out more than they did during the height of the pandemic in March 2020 for protection against slides in the euro over the next month, according to risk reversals measured by puts over calls.

“My sense now is the euro trend should continue lower,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho, adding that a close below the 1.10 level on Friday would be “likely to send off alarm bells for further euro selling.”