By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The U.S. dollar rallied on Friday after data showed the world's largest economy created more jobs than expected last month, reinforcing expectations that the Federal Reserve will pause its rate-cutting cycle at its policy meeting later this month.

The greenback also extended gains following a report that showed U.S. consumer inflation expectations for the next year and beyond jumped in January.

The dollar rose to its highest since July against the yen after the data, before turning lower on the day. It was last down 0.1% at 157.845 yen .

The euro, on the other hand, dropped to its lowest since November 2022 versus the greenback. The single euro zone currency was last down 0.5% at $1.0244, falling for a second straight week. A significant number of foreign exchange forecasters expect the euro to reach parity with the dollar in 2025, a Reuters poll showed this week.

The greenback's rally kicked off after a Labor Department report showed that the U.S. economy added 256,000 jobs in December, much higher than economists' forecasts for an increase of 160,000. The November jobs number, however, was revised downward to 212,000.

The unemployment rate, meanwhile, dipped to 4.1%, compared with expectations of a 4.2% reading, while average hourly earnings increased 0.3% last month after gaining 0.4% in November. In the 12 months through December, wages advanced 3.9% after rising 4.0% in November.

"The strength of the December payrolls data clearly removes any need for the Fed to cut rates with urgency," wrote Jane Foley, head of FX strategy, at Rabobank in London.

"For a while it has been Rabobank's central view that the Fed will cut rates just once this year. However, if (Donald) Trump wastes no time in initiating his policies, it is conceivable that window could close altogether."

Trump, during his campaign, vowed to impose tariffs, cut taxes, and undertake mass deportation of undocumented immigrants, all of which are widely viewed as inflationary.

A University of Michigan's consumer sentiment survey indicating a rise in inflation expectations also supported the dollar.

The report showed that one-year inflation expectations jumped to 3.3% in January, the highest level since May, from 2.8% in December. That raised the 12-month inflation expectations above the 2.3%-3.0% range seen in the two years prior to the COVID-19 pandemic.

Following the U.S. data, the U.S. rate futures market has fully priced in a pause in the Fed's easing cycle at the January meeting, according to LSEG estimates. The market has also priced in just 27 basis points (bps) of easing in 2025 or just one rate cut, with the first rate move likely at the June meeting.

In other currencies, sterling tumbled to its weakest level since November 2023 against the dollar, last changing hands at $1.2208, down 0.8% . It dropped as well on Thursday in tandem with a selloff in gilts and concerns about British government finances.

In Japan, prospects of sustained wage gains and the boost to import costs from a weak yen have heightened attention within the central bank to rising inflationary pressures that may lead to an upgrade in its price forecast this month, sources said.

The dollar will end the week up 0.4% versus the yen. The U.S. currency has risen in five of the last six weeks against the Japanese unit.

The dollar index , meanwhile, advanced to its highest since November 2022, and was on track for a sixth consecutive weekly gain. That's its longest run since an 11-week streak in 2023. The index was last up 0.4% at 109.68.

"The biggest risk to that U.S. dollar bullish view would be if participants seek to take profit, trim risk early next week ahead of Trump's inauguration," said Michael Brown, senior research strategist, at Pepperstone in London.

Currency              

bid

prices at

10

January​

08:24

p.m. GMT

Descripti RIC Last U.S. Pct YTD Pct High Low

on Close Change Bid Bid

Previous

Session

Dollar 109.69 109.2 0.47% 1.11% 109.97 109.

index 07

Euro/Doll 1.0238 1.0299 -0.59% -1.11% $1.0312 $1.0

ar 212

Dollar/Ye 157.84 158.105 -0.17% 0.31% 158.86 157.

n 305

Euro/Yen 161.61​ 162.85 -0.76% -0.99% 163.18 161.

22

Dollar/Sw 0.9171 0.9123 0.54% 1.07% 0.9189 0.91

iss 15

Sterling/ 1.2202 1.2307 -0.84% -2.43% $1.2323 $1.2

Dollar 194​

Dollar/Ca 1.4433 1.4392 0.3% 0.38% 1.4442 1.43

nadian 76

Aussie/Do 0.6142 0.6198 -0.86% -0.7% $0.6206 $0.6

llar 139

Euro/Swis 0.9388 0.9393 -0.05% -0.05% 0.9419 0.93

s 86

Euro/Ster 0.8387 0.8365 0.26% 1.38% 0.8393 0.83

ling 66

NZ 0.5553 0.56 -0.79% -0.72% $0.5603 0.55

Dollar/Do 43

llar

Dollar/No 11.4772​ 11.3944 0.73% 0.98% 11.5117 11.3

rway 921

Euro/Norw 11.7512 11.7186 0.28% -0.15% 11.791 11.7

ay 174

Dollar/Sw 11.2154 11.1538 0.55% 1.8% 11.2547 11.1

eden 36

Euro/Swed 11.483 11.4881 -0.04% 0.14% 11.5053 11.4

en 75

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Saqib Iqbal Ahmed in New York and Greta Rosen Fondahn in Gdansk; Editing by Christina Fincher and Andrea Ricci)