By Karen Brittl
NEW YORK (Reuters) – The U.S. dollar fell to a four-month low on Friday after a weaker-than-expected July employment report raised expectations the Federal Reserve will cut interest rates by 50 basis points in September as the economy deteriorates.
Employers added 114,000 jobs, missing expectations for a gain of 175,000. The unemployment rate rose to 4.3%, above economists’ expectations for it to remain unchanged for the month at 4.1%.
Traders are now pricing in a 71% chance that the Fed will cut rates by 50 basis points in September, up from 31% before the data was released and from 22% on Thursday, according to CME Group’s (NASDAQ:) FedWatch tool.
Interest rates are now expected to be cut by at least 25 basis points in September, and by 116 basis points by the end of the year.
“This is what fear of growth looks like,” said Wasif Latif, president of Sarmayeh Partners in Princeton, New Jersey. “The market has now realized that the economy is actually slowing down.”
The US dollar index fell 1.1% to 103.21, hitting its lowest level since March 14 at 103.12, its lowest since March 14. It was the biggest daily percentage decline since November.
Treasury yields also fell, with the yield on the interest-rate-sensitive two-year note falling to 3.845%, the lowest since May 2023, and the yield on the benchmark 10-year note hitting a low of 3.79% for the first time since Dec. 27.
The U.S. Labor Department said Hurricane Beryl, which hit Texas on July 8, had “no discernible impact” on jobs data, ruling out one theory that may have explained the weakness.
“I don’t see any silver lining anywhere,” said Steve Englander, head of G10 global FX research at Standard Chartered in New York. “They say they haven’t had any kind of impact from the hurricanes, and if they have, it’s not enough to offset the degree of vulnerability we’re seeing.”
But some economists were not convinced that Peril had no impact, and saw some bright spots in Friday’s jobs data.
The U.S. Federal Reserve left interest rates unchanged at the end of its two-day meeting on Wednesday, with Fed Chairman Jerome Powell saying rates could be cut in September if the U.S. economy follows its expected path.
Chicago Federal Reserve President Austin Goolsbee said Friday the U.S. central bank should move in a “steady” manner, in a measured response to market pricing in an interest rate cut.
Weak jobs data, a weak manufacturing report and some disappointing corporate forecasts in recent days have heightened concerns that the economy is deteriorating at a faster pace.
But despite Friday’s weak jobs report, Englander notes that “most other indicators are not consistent with a really sharp slowdown right now… Everything is weak, but nothing is catastrophically weak.”
New economic data will now be closely watched for confirmation on whether the growth outlook is as bad as expected.
The US dollar fell 1.84% against the Japanese yen to 146.62 yen, hitting its lowest level since February 2 at 146.42 yen.
The yen has risen since hitting a 38-year low of 161.96 against the dollar on July 3, supported by interventions by Japanese authorities and traders unwinding carry trades in which they had been shorting the yen and holding long U.S. dollar assets.
The dollar received additional support on Wednesday when the Bank of Japan raised interest rates to 0.25%, the highest level since 2008.
The Japanese yen and Swiss franc were also supported by safe-haven demand amid stock sell-offs and geopolitical concerns.
The funeral of Hamas leader Ismail Haniyeh was held in Qatar on Friday, after his assassination two days ago in the Iranian capital, Tehran, which investors fear will lead to an expansion of the conflict in the Middle East.
The dollar fell 1.58% to 0.859 Swiss francs.
The euro rose 1.12% to $1.0912 and reached $1.0927, its highest level since July 18.
Sterling rose 0.53 percent to $1.2807, recovering from a one-month low after the Bank of England cut interest rates from a 16-year high on Thursday.
In cryptocurrencies, Bitcoin fell 2.74% to $62,878.
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