Dollar bounces on job gains, then pares ahead of CPI

By Karen Brettell

NEW YORK, Sept 4 (Reuters) - The dollar jumped on Friday after data showed that U.S. employers added 162,000 jobs in August, well above the 56,000 additions expected by economists, boosting bets on a September Federal Reserve interest rate hike.

The dollar gave up some of its early gains, however, as U.S. markets head into a three-day holiday weekend and as traders waited on next week's inflation data. Labor Day on Monday is a U.S. public holiday.

August's job gains followed an unexpected 23,000 job decline in July. The unemployment rate held steady at 4.1%.

"I don't think this number changes anything really," said Noel Dixon, senior macro strategist at State Street, pointing ahead to next week's inflation reading. "It's all going to boil down to what that core number is going to be next week and I think the markets are going to react accordingly."

Economic data for August is seen as key to whether the Fed will hike at its September 15-16 meeting. Fed Governor Christopher Waller said on Thursday that if upcoming data confirms inflation pressures are cooling off, he is inclined to argue in favor of keeping interest rates steady.

Producer price inflation data is due on Thursday and consumer price inflation data is scheduled for Friday next week. Economists expect core CPI to ease to 2.4% on the year, from 2.5% in July.

Elements of Friday's jobs data also supported slowing inflation, Dixon said.

“In today's number the unemployment rate stayed steady but if you look at wages year over year, that's the lowest since June 2021. So if Waller and (Fed Chairman Kevin) Warsh and (Fed Bank of New York President John) Williams, who I think are very influential, wanted to hang their hat on something, they could hang it on that," Dixon added. 

Wages increased 3.1% in the 12 months through August after rising 3.2% in July.

Fed funds futures traders raised bets on a September hike to 57%, from 50% before the data.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.21% to 99.17, with the euro down 0.12% at $1.1611.

YEN SURGE

Against the Japanese yen, the dollar strengthened 0.26% to 156.19.

The yen has surged this week, however, as traders boost bets on more or faster Bank of Japan interest rate hikes, and it is testing the 155.21 level, which was its high after last month's U.S.-Japan intervention. If it breaks through that, it will reach its strongest level since May 6.

Japan's top currency diplomat, Atsushi Mimura, said on Friday he remained on alert to exchange-rate moves, maintaining a warning on Tokyo's readiness to intervene in the market to combat excessive yen declines.

Traders are also speculating on whether Japanese investors, including insurance companies and pension funds, will pull investments out of U.S. Treasuries and into Japanese government bonds as Japanese debt yields rise. 

JPMorgan said expectations for Japanese pension fund repatriation and BOJ rate hikes "look somewhat overdone" at the moment, but added that an unwinding of an estimated 16 trillion to 17 trillion yen ($102.36 billion to $108.76 billion) in yen shorts could send the dollar to a 142-to-146 range against the Japanese currency. 

In cryptocurrencies, bitcoin fell 2.32% to $79,595. 

(Editing by Alison Williams, Andrew Heavens and Edmund Klamann)