By Yasin Ebrahim
Investing.com – The dollar jumped Thursday as positive labor market data stoked optimism for a strong monthly jobs report due Friday that will likely lay out the carpet for talks on tapering at the Federal Reserve's meeting later this month.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, added 0.70% to 90.53.
"[T]omorrow's payrolls report … could be decisive for the Fed tapering discussion in two weeks time," Commerzbank (DE:CBKG) said in a note.
The Federal Reserve has previously highlighted "sustained progress" as the benchmark to begin curtailing its $120 billion monthly purchases.
Inflation, which forms part of the Fed's dual mandate, is an important cog in the wheel of the Fed monetary policy decision.
The Fed has insisted that it would allow inflation to remain above 2% for some time, and stuck to its bet that inflation will be transitory.
But market participants are nervous the Federal Reserve may find itself behind the curve, potentially rising the risk it may have to rein in policy aggressively to get a grip on rising price pressures.
The latest data on the Fed's preferred measure of inflation, the core price consumer expenditure index, came in at 3.1% for April, exacerbating investor concerns.
But allowing the economy to run hot is starting to have an impact on businesses, which are faced with a double whammy of headwinds as rising input costs and labor shortages are set to continue for months.
Incoming data including the labor market and services data Thursday, has shown these factors are likely to be sustained.
But the all-important jobs report due Friday will be take the spotlight as the Fed has shifted its priority to the labor market.
"A firmer employment report … could tip the scale for Powell to officially kick off the tapering discussion at the FOMC meeting in two weeks' time," Commerzbank added.
"Our economists have brought forward their tapering call to Q4 this year. Together with further strong increases in core inflation through September (taking core CPI above 3.5%)," it added.
Against the backdrop of increasing bets on the Fed tapering sooner rather than later, U.S. rates have started to catch a bid into the jobs numbers, and could take dollar along for the ride.