Dollar hits four-month low as weak US jobs data spurs rate cut

NEW YORK (Reuters) – The U.S. dollar fell to a four-month low on Friday after a weaker-than-expected July jobs report raised expectations that the Federal Reserve will cut interest rates by 50 basis points in September as the economy deteriorates.

Employers added 114,000 jobs, below expectations for an increase of 175,000. The unemployment rate rose to 4.3%, above economists’ expectations for it to remain unchanged on the month at 4.1%.

According to the CME Group’s FedWatch Tool, traders are now pricing in a 71% probability that the Fed will cut rates by 50 basis points in September. Before the data release, the probability was 31% and was 22% on Thursday.

A cut of at least 25 basis points is fully priced in for September, with an easing of 116 basis points now expected by year-end.

“This is what growth fear looks like. The market is now realizing that the economy is indeed slowing,” said Wasif Latif, president and chief investment officer at Sarmaya Partners in Princeton, New Jersey.

The dollar index last fell 1.1% to 103.21, dropping to 103.12, its lowest since March 14. It was the biggest one-day percentage drop since November.

Government bond yields also fell, with two-year interest-rate-sensitive yields falling to 3.845%, the lowest level since May 2023, and benchmark 10-year yields hitting a low of 3.79% for the first time since Dec. 27.

The U.S. Department of Labor said Hurricane Beryl, which made landfall in Texas on July 8, had “no discernible effect” on employment numbers, rejecting a theory that could explain the weakness.

“There’s no silver lining anywhere, as far as I can tell. They say they haven’t had any hurricane impacts, and even if they have, it’s not enough to offset the degree of softness that we’re seeing,” said Steve Englander, head of global G10 FX research at Standard Chartered’s New York Branch.

However, some economists were not convinced that Beryl had no impact and saw some bright spots in Friday’s employment figures.

The Fed left interest rates unchanged after its two-day meeting on Wednesday, and Fed Chairman Jerome Powell said interest rates could be cut as early as September if the U.S. economy moves as expected.

Chicago Fed President Austan Goolsbee said Friday that the U.S. central bank should act in a “stable” manner, a mild rebuttal to market pricing for rate cuts.

Weaker employment numbers, a weak manufacturing report and some disappointing corporate forecasts in recent days have raised fears that the economy is deteriorating at a faster pace.

But despite Friday’s weak jobs report, Englander notes that “most other indicators right now are not consistent with a really sharp slowdown… Everything is soft, but nothing is catastrophically soft.”

New economic figures are now being watched even more closely to confirm whether the growth outlook is indeed as bad as feared.

The dollar fell 1.84% to 146.62 Japanese yen, falling to 146.42, its weakest level since Feb. 2.

The yen has risen since hitting a 38-year low of 161.96 against the dollar on July 3, spurred by intervention by Japanese authorities and traders unwinding carry trades, in which they went short on the yen and long on U.S. dollars.

Interest rates were raised further on Wednesday when the Bank of Japan raised the rate to 0.25%, the highest level since 2008.

The Japanese yen and Swiss franc also benefited from safe-haven demand amid stock sell-offs and geopolitical concerns.

The funeral of Hamas leader Ismail Haniyeh took place in Qatar on Friday after he was assassinated in the Iranian capital Tehran two days ago, a move investors fear could lead to a growing conflict in the Middle East.

The dollar fell 1.58% to 0.859 Swiss francs, its lowest level since February 2.

The euro rose 1.12% to $1.0912, reaching $1.0927, its highest level since July 18.

The pound rose 0.53% to $1.2807, rebounding from a one-month low after the Bank of England cut interest rates on Thursday from a 16-year high.

In cryptocurrency terms, Bitcoin fell 2.74% to $62,878.