Stefano Rebaudo

(Reuters) – The U.S. dollar hit a seven-week high on Monday after rising on Friday’s mighty U.S. jobs data and an escalating conflict in the Middle East.

The dollar gained after the U.S. jobs report in September showed the biggest gain in six months, a decline in the unemployment rate and solid wage increases, pointing to a resilient economy and forcing markets lower on the Federal Reserve’s interest rate cuts.

Analysts say many of the factors that weighed negatively on the dollar over the summer have reversed, citing subsiding recession fears and price action suggesting that the pricing limits of the dovish reaction have been reached based on this data set.

“We don’t see any driver for a recovery in structural US dollar short positions over the next few weeks,” said Francesco Pesole, forex strategist at ING.

“Markets appear to have given up on another 50 basis point cut and inflation data is not expected to change that, and while the situation in the Middle East may not continue to heat up, the consensus seems to be that for now de-escalation is not likely, he added.

The measure against main competitors increased by 0.05% to 102.60. It rose to a seven-week high of 102.69 on Friday, recording a more than 2% gain for the week, the largest in two years. At the beginning of last week it was just above 100.

MUFG signaled that the dollar index has returned to support at 100.00 for the second time in recent years. The last time in July 2023, the dollar index passed the test but failed to exceed the level of 100.00, after which there was a strong rebound in the following three months (+7.8%).

“The extent of fiscal stimulus in China, which would mostly help economies outside the U.S., will be one of the main drivers for the dollar in the short term, alongside macro data that could influence the Fed’s policy path,” said Lefteris Farmakis, forex strategist at Barclays.

China will soon announce details of its fiscal plan to stimulate its economy.

In the Middle East, Israel bombed Hezbollah targets in Lebanon and Gaza on Sunday, ahead of the first anniversary of the Oct. 7 attacks that sparked the war. Israel’s defense minister also stated that all options for retaliation against Iran’s greatest enemy are open.

The euro was at $1.0970, down 0.06%.

“Effective fiscal measures in Italy and France would bring marginal benefits to the euro because they would strengthen the sovereign’s creditworthiness and therefore the credibility of the eurozone project,” argued Barclays’ Farmakis.

Both countries that the European Union included in the so-called excessive deficit procedure, take action to reduce budget deficits.

The yen fell slightly to 149.10 per dollar, its weakest level since Aug. 16, before paring losses to settle around 148.60. This followed a more than 4% decline last week, the largest weekly percentage decline since early 2009.

The yen’s faint performance also has to do with modern Prime Minister Shigeru Ishiba’s comments last week, which fueled expectations that interest rate hikes in Japan would be a long way off.

reached a modern two-month high of 4.016% in London trading.

However, Barclays assessed it had room for gains of about 20 basis points even after allowing for a worst-case economic scenario to deteriorate, arguing that the latest employment data reinforced its belief in the Fed’s long and gradual easing cycle.

BofA currently forecasts that the Fed will cut interest rates by 25 basis points per meeting through March 2025, and then by 25 basis points per quarter through the end of 2025.

Markets expect the Federal Reserve to cut interest rates by just 25 basis points in November, rather than 50 basis points, after the jobs data. CME companies now estimate a 95% chance of a quarter-point cut, up from 47% a week ago and a 5% chance of no cut, according to the FedWatch tool

The pound sterling fell 0.4% against the dollar.

It suffered its biggest daily decline since April last week after comments from Bank of England Governor Andrew Bailey resulted in a significant loosening of net long positions in the pound, making the British currency more susceptible to changes in sentiment.