U.S. Dollar Rallies Ahead of Employment Data

NEW YORK (TheStreet) -- Ahead of Friday's always-important nonfarm payrolls data (NFP), there were estimates released Wednesday by analysts the report might show an increase for labor on payrolls in March. This estimate came to increase the already growing sentiment that the Federal Reserve is having an early view on raising interest rates.

After last month's FOMC meeting and during her first press conference as Fed chairman, Janet Yellen stated  the Federal Reserve might end its monthly quantitative easing this autumn and could begin raising interest rates six months after that. The initial $85 billion monthly QE program is being trimmed by the Fed on a regular basis by $10 billion reductions since December 2013, and the last one was decided during the latest FOMC meeting.

As of this month, the asset purchasing program will be $55 billion until further reduction by the Fed.

The NFP is a report released by the U.S. Department of Labor shows monthly additions or reductions of people on payrolls. Even though NFP has been traditionally viewed by the Fed as a benchmark for shifting the interest rates when the unemployment rate reduces to 6.5%, Janet Yellen said that other economic data such as general conditions in the labour market, inflation readings and also conditions in the financial markets will also be of significance.

There is optimism for a stronger U.S. economy, and it's already evident by the recent surge of the dollar against the yen as the USD/JPY is trading on a two-month high, with back-to-back increases for the last five days. The U.S. dollar increased against the yen by 1.8% since March 27.

At the other end of the globe, weak economic indicators coming from the Land of the Rising Sun are not doing much to improve the situation of the weakening yen. A report measuring the sentiment of Japanese manufacturers about the economy showed that the index increased marginally to 17 for the first quarter of 2014, in relation to 16 in the previous quarter.

Even though this shows a small increase, the index was lower than analysts' forecasts of a figure of 18. A separate survey by the Bank of Japan (BOJ) earlier Wednesday revealed that local companies are expecting Japan's inflation to increase by 1.7% over the next three years.

Since that expectation is clearly short of the 2% inflation target set by the BOJ over a two-year period, there are growing concerns that Japanese policymakers might deploy additional measures to aid the economy.

It currently looks like traders do not want to be left behind in case of a further rally of the U.S. dollar, especially if the upcoming NFP data show an increase in U.S. payrolls, and some of them already invested in favor of the world's largest economy.

The dollar is really sensitive to news these days after the Fed's comments on interest rates, and traders should stay informed of upcoming economic developments to trade the markets successfully.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jay Elliott-Purdy joined easy-forex in 2010 and is the UK Branch Manager.

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