US rate increase becomes more likely as unemployment dips to 5%

Unemployment in the US declined to 5%, near the levels economists consider to be full employment, according to official data. This could convince the US Federal Reserve to raise interest rates when it meets in December.

Non-farm payrolls, or employment across all sectors excluding agriculture, increased by 271,000 in October. The growth was almost twice the 142,000 recorded in September and significantly higher than the 185,000 expected by economists in a Reuters poll.

The US labor department also reported that wages increased by a healthy 0.4% month-on- month. Analysts said the data made prospects of a rate hike even more certain.

The Fed chairwoman, Janet Yellen, in September had said she was confident of a US recovery amid a sluggish global economy. She also reiterated the Fed's plans to withdraw the central bank's stimulus by year-end as long as inflation was stable and employment levels remained strong. Yellen has since repeated her forecast.

The Fed had postponed rate increases because of factors such as disappointing jobs figures during the summer, global market turmoil triggered by China slowdown and the eurozone's failure to resolve the Greek financial collapse.

Dollar hits seven-month high

After release of the employment numbers, the US dollar touched a seven-month high, climbing more than 1%. Benchmark US bond yields rose to their highest in five years with traders factoring in a 72% probability of a Fed rate increase next month.

However, stock market futures on New York exchanges declined as a rate increase would raise costs of borrowing.

Rob Carnell, an analyst at ING Financial Markets, said the positive US unemployment data alone would not guarantee a rate increase and pointed out that another labour report is due before the 16 December policy meeting. "We feel that we would need to see a catastrophically bad November labour report for the Fed to sit on their hands again" he added.