The dollar jumps to a 4-week high as traders place bets on more Fed rate hikes after strong private payrolls report

• A closely watched measure of the US dollar pushed to its highest in about a month on Thursday after a strong ADP jobs report.
• The US Dollar Index climbed past 105 for the first time since early December as the Fed is likely to stick to hiking interest rates.

A key measure of the US dollar's performance climbed to its highest in about a month Thursday after a strong private-sector jobs report raised the prospect of more rate hikes from the Federal Reserve.

The US Dollar Index popped up 1% to as much as 105.27, the highest since December 8. The dollar jumped against the euro, gaining 0.7% to buy 0.9497 euro, and it climbed against the Japanese yen, up 0.7% to fetch ¥113.68.

The "swift recovery for the dollar" also saw the greenback soar against the British pound, Fawad Razaqzada, market analyst at Forex.com, wrote in a note. The dollar surged by 1.3% against the UK currency.

The rally came after ADP said private employment increased by 235,000 jobs in December. The reading outstripped a consensus estimate of 150,000 jobs in a Bloomberg survey of economists. Meanwhile, annual pay grew by 7.3% over the same period a year earlier, although slowing from 7.6% in November.

Investors after the report priced in stronger expectations that the Federal Reserve will continue raising interest rates this year, a prospect that boosts the appeal of the dollar against other currencies. The CME FedWatch tool showed a 41.9% probability the Federal Reserve will increase the fed funds rate by 50 basis points in its February 1 meeting, up from 30.3% a day prior.

The ADP report "reduced fears about a downturn in employment and has raised worries that wage inflation could accelerate further and thus provide a major source of risk in the inflation outlook," Razaqzada said. "Accordingly, traders have pushed up their expectations for the terminal interest rates in the US," with June fed funds futures contract implying a peak interest rate of above 5%.

For the March 22 Fed decision, the odds of a rate hike of 25 basis points rose to 37.1% from 25.1% a day ago. And for the May 2 release, the odds of a quarter-point rate hike moved up to 15% from 9.8%. Such a move would put the fed funds rate at a range of 5.25% to 5.5%.

Minutes released Wednesday from the Federal Reserve's meeting in December showed policy makers don't expect to start cutting interest rates in 2023, a view held by many major banks and economists who foresee a recession.

The Fed views inflation as still "unacceptably high," the minutes showed. The Fed's target is 2%.