Recent official data showed an increase in U.S. jobless claims, which analysts said might persuade the Federal Reserve to reduce interest rates soon to support the economy.
According to the Labor Department, initial claims for state unemployment benefits increased by 13,000 to a seasonally adjusted 231,000 for the week ended on November 11. Economists surveyed by Reuters had earlier predicted 220,000 claims for that period.
The data add to the evidence suggesting that inflation is subsiding and consumer spending is moderating, reinforcing expectations that the Fed's monetary policy tightening cycle is nearing its end.
However, the increase in initial and continuing claims likely does not represent a significant shift in overall labor market conditions. Economists have noted challenges in adjusting the data for seasonal variations following the unprecedented surge in unemployment benefit applications during the early stages of the COVID-19 pandemic.
Karl Schamotta, chief market strategist at Corpay, said that financial markets expect a swift shift towards interest rate cuts in 2024. Historically, a significant economic downturn has been necessary to trigger such a change.
"Markets are anticipating a rapid pivot towards cuts in 2024 despite the fact that historically we needed a big hit to the economy to deliver that."
Karl Schamotta, chief market strategist at Corpay
"The challenge here is how we reconcile the view of a soft landing with rapid and significant rate cuts in 2024?" Schamotta said, as quoted by Reuters. "My view would be that at this point, markets are moving too fast ... and as a result, the U.S. dollar could outperform relative to expectations in early 2024."
Traders remain optimistic that interest rates will not increase further. Federal fund futures indicate a one-in-three probability of the first rate cut occurring by March.
James Kniveton, senior corporate F.X. dealer at Convera, noted that the economy remains resilient despite the decline in inflation and may allow the Fed to raise interest rates. Nevertheless, Kniveton added that there is a lack of enthusiasm for rate hikes among Fed officials.
"While inflation is falling, the economy remains robust, which might even allow the Fed to increase rates if they chose."
James Kniveton, strategist at Deutsche Bank
On Thursday, Deutsche Bank strategist Jim Reid highlighted research from his bank's economists indicating that this marks the seventh instance in the past two years where markets have anticipated a rapid shift towards rate cuts by the Fed. In the previous six instances, these expectations were ultimately reversed.
"At some point, there will be a dovish pivot, and this could be closer than the others to it, but be wary that we've now been to this well seven times in two years," Reid said.
The dollar index, which tracks the dollar's value against six other major currencies, increased slightly by 0.08 percent following the release of the unemployment claim data.
The euro gained 0.02 percent to $1.0848, following a 1.69 percent surge on Tuesday, its largest single-day percentage gain since November 2022. This move reflects investors' anticipation that the Fed's easing cycle could begin sooner than expected.
Among other major currencies, the Japanese yen appreciated 0.47 percent to 150.66 per dollar, reversing some of its earlier losses. The yen had recently slipped to a one-year low of 151.92.
On the other hand, sterling weakened 0.10 percent to $1.2406, while the Australian and New Zealand dollars declined by 0.6 percent and 0.85 percent, respectively. The Aussie's fall came despite a strong rebound in employment, as traders noted that the gains were mainly in part-time labor and that the jobless rate ticked higher.
Oil prices dropped around five percent on Thursday to their lowest in four months, dragged down by concerns about slowing global economic growth and weaker demand. Brent futures settled down $3.76, or 4.6 percent, to $77.42 a barrel, while U.S. West Texas Intermediate crude (WTI) shed $3.76, or 4.9 percent, to $72.90.
Gold prices rose more than one percent on Thursday as the dollar weakened and investors sought safe havens amid concerns about global economic growth.