The US dollar experienced a sharp decline on Thursday following disappointing employment data that significantly altered Federal Reserve rate hike expectations. According to Reuters, the dollar index fell 0.56% to 100.83, with the currency earlier reaching 100.55, the lowest level since June 18, and heading for its biggest one-day drop since April 30. The euro gained 0.52% to $1.1435, reaching $1.1472, the highest since June 22, as markets quickly repriced expectations for Federal Reserve policy. The dollar had been supported in recent months by rising expectations of Fed rate hikes as the central bank battles inflation running well above its 2% annual target.
US Federal Reserve rate hike expectations have been significantly revised following softer-than-expected employment data. According to Reuters, Fed funds futures traders now see a 54% chance of a rate hike by September, down from 67% before the report. However, latest Polymarket data shows an even more dramatic shift, with 50% chance of a hike this year, down from 54% as of yesterday. The revision comes after private payroll and nonfarm payroll data for June showed employers added 57,000 jobs, well below economists' expectations for 110,000 job gains. CME FedWatch data now shows an 82.4% chance that the Fed will hold rates steady, up from around 72% as of yesterday, with market participants betting the Fed will leave interest rates unchanged ahead of the July FOMC meeting.
William Lee, Chief Economist and Managing Director of Global Economic Advisors, believes the US labour market is weaker than headline payroll data suggests and expects the Federal Reserve to eventually rethink how it interprets employment data. According to CNBC TV18, Lee notes that the Labour Department publishes another survey that asks individuals whether they are working, rather than asking companies how many jobs they created, and that survey has shown a decline of about 115,000-117,000 people reporting employment every month over the past year. He argues that when looking at the US employment situation, it is not very positive, with most of the weakness in job creation coming from post-COVID productivity gains as companies have become more capital-intensive and reorganized their production processes to use labour more efficiently.
The Japanese yen experienced a dramatic rally as traders speculated about potential intervention by Japanese authorities. According to Reuters, the yen gained 0.95% against the greenback to 161.04 per dollar and reached 160.62, the strongest since June 18, with the currency on track for its biggest one-day gain against the dollar since April 30. Sources told Reuters that Japanese officials were abandoning their habit of telegraphing intervention risks, instead signaling a more targeted campaign to squeeze speculators and raise the cost of betting against the yen. Officials were avoiding any suggestion of a specific "line in the sand" exchange-rate level that would trigger action, in a more aggressive approach aimed at keeping traders guessing. Abbas Keshvani, Asia macro strategist at RBC Capital Markets, noted that "the timing of the move does suggest that it was," though Japan's Ministry of Finance declined to comment on the intervention speculation.
Gold is heading for its first weekly rise in five weeks as easing Federal Reserve rate hike expectations boost safe-haven demand. According to Reuters, the precious metal's rally comes as Fed funds futures traders now see a 54% chance of a rate hike by September, down from 67% before the report. The shift in rate hike expectations has provided support for gold, which is considered a traditional safe-haven asset during periods of economic uncertainty. The precious metal's performance reflects broader market sentiment as investors reassess the timing of Federal Reserve policy changes amid weakening economic data.
