There are new expectations for US monetary policy, and this has been directly reflected in the dollar’s movements this week. The slowdown in the labor market reinforces the theory that the Federal Reserve may adopt a more flexible stance in the coming months. This scenario has generated uncertainty for investors, given the possibility of interest rate cuts.
Weak employment data raises expectations for interest rate cuts and a falling dollar
The dollar dropped on Wednesday and the euro hit a one-week high as traders bet that the Federal Reserve will cut rates more times than previously expected this year, following weaker than expected jobs data for July. With no major U.S. economic releases on Wednesday traders continued to focus on the implications from Friday’s jobs report. U.S. employment growth was weaker than expected in July while the nonfarm payrolls count for the prior two months was revised down by a massive 258,000 jobs, suggesting a sharp deterioration in labor market conditions.
The greenback fell sharply after the report, paring gains from what had been a relatively strong July for the currency, the first month this year in which the dollar index posted a gain. “We had the first dollar bounce under Trump’s second term, and many people thought that maybe it had some legs, but I think Friday’s jobs data killed it,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “The renewed speculation of not only a cut in September, but another cut at the end of the year, has capped the dollar’s bounce.”
Fed funds futures traders are now pricing in an 89% probability of a 25 basis point cut at the Fed’s September meeting, up from 48% a week ago, according to the CME Group’s FedWatch Tool. In total, traders see 58 basis points in cuts this year. The Fed may need to cut interest rates in the near term in response to a slowing U.S. economy, even though it remains unclear whether tariffs will continue to push inflation higher, Minneapolis Fed President Neel Kashkari said on Wednesday.
Euro strengthens as political tensions widen dollar losses
The dollar added to its drop on Friday after U.S. President Donald Trump fired a top Labor Department official, alleging data manipulation. The dollar index was last down 0.33% on the day at 98.41 and reached 98.36, the lowest since July 28. It posted a 1.35% drop on Friday, the largest one day fall since April. The euro rose 0.47% to $1.1628 and got as high as $1.1636, the highest since July 28. It recorded a 1.48% gain on Friday. Investors are also focused on Trump’s expected nomination to fill a coming vacancy on the Federal Reserve’s Board of Governors and the candidates for the next Fed Chair.
With the resignation of a high-ranking Labor Department official, the case of alleged data manipulation made headlines, adding further instability to an already volatile scenario. The episode heightens the perception of possible political interference in sensitive economic data. This undoubtedly affects the credibility of the indicators used by the Fed in formulating monetary policy.
Market bets on interest rate cut for September
US economic projections have already improved, with only bets on a 25 basis point cut at the September meeting. Most investors support the Fed acting preemptively to contain a sharper slowdown.
Fiscal and political uncertainties grow
The dollar faces a delicate moment in its trajectory, due to weak economic data and political instability caused by interest rates and taxes. In the coming months, we will be able to monitor the Federal Reserve’s response, and it is expected that a definition will be made as to whether the devaluation will be temporary or not.
GCN.com/Reuters.