Global FX markets reacted to fresh U.S. labor data on Friday as the dollar slipped and appeared set for its first two-week losing run since late May. A negative surprise in July nonfarm payrolls prompted traders to pare back the probability of further Federal Reserve rate hikes.
At 15:28 ET (19:28 GMT), the U.S. dollar index - which measures the greenback against a basket of six major currencies - was down 0.4% at 99.54. The index was also down 0.4% for the week.
Major currency pairs moved in line with the dollar's retreat. The euro rose 0.4% to $1.1568 while sterling climbed 0.3% to $1.3502; both currencies were on track for weekly gains. The Japanese yen strengthened as the USD/JPY pair fell 0.6% to 157.48.
Jobs report undercuts rate-hike bets
The U.S. Bureau of Labor Statistics reported that nonfarm payrolls fell by 23,000 in July, versus a consensus forecast for an 85,000 increase. That marked the first monthly decline in jobs since February. Employment figures for May and June were also revised down by a combined 103,000. The unemployment rate slipped to 4.1% in July from 4.2% in June.
The headline drop was driven largely by a near 50,000 monthly decrease in local government education payrolls, which the report identified as a key component of the payroll decline.
Jeffrey Roach, chief economist at LPL Financial, observed that total private payrolls actually rose by 30,000 in July, marginally below a breakeven pace. He noted the top-line fall was chiefly attributable to the decline in local government education jobs, adding that federal and state payrolls increased by about 4,000 on net.
Roach also pointed to broader signs of resilience in the labor market: weekly data released earlier in the week showed initial jobless claims remaining below 200,000 for a third consecutive week, a pattern the report said is uncommon outside historical stretches such as the late 1960s.
The report lands amid a complex backdrop for the Fed. On one hand, the labor market still displays underlying strength. On the other, inflationary pressures have risen amid volatile oil prices tied to the Middle East conflict, and some Fed policymakers displayed a preference for higher rates at the central bank's July meeting.
That divergence in the Fed's dual mandate - between price stability and employment - poses a policy dilemma. Elevated inflation dynamics argue for further tightening, while a resilient labor market limits the space for rate cuts. Higher borrowing costs can help rein in inflation but risk weighing on both jobs and broader economic activity.
Payden & Rygel's economics team said they still saw a hiking bias at the Fed, driven not by an overheating labor market but by a persistent miss on the inflation target. The team added that while the negative jobs print might delay the timing of hikes, it would not necessarily stop hawkish members who favored increases at the July meeting. For colleagues closer to a hold, weak job growth could provide cover to wait longer and reduce the odds of a September hike.
Not all Fed officials were aligned at the July decision to keep rates unchanged. The article referenced dissents from Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan, each of whom preferred a quarter-point increase rather than a pause.
Oil, geopolitical flows and U.S. support for yen
The dollar had earlier found some support this week from falling oil prices, as market participants reacted to reports suggesting a potential deal to reopen the strategically important Strait of Hormuz. Axios reported that Iran was awaiting final approvals from its Supreme National Security Council on an agreement with Oman and the U.S. to reopen the waterway, a development that traders saw as easing near-term oil supply concerns.
In currency markets, the other dominant storyline was the Japanese yen. The yen largely retained the gains won after last week's extraordinary intervention, in which authorities moved to support their currency.
U.S. Treasury Secretary Scott Bessent confirmed that Washington had participated in joint purchases of yen with Japan, marking the first coordinated intervention with the U.S. since 2011 and the first occasion the U.S. specifically intervened to strengthen the yen since 1998. Bessent told CNBC that U.S. involvement was motivated by concerns that further yen depreciation could destabilize markets across Asia.
Before the intervention, the yen had weakened to around 164 per dollar, a forty-year trough that placed strain on Japan's import-dependent economy. To buttress the yen, Japanese authorities often sell U.S. Treasury bonds to generate cash needed to buy their own currency; Japan is the largest single foreign holder of U.S. Treasuries.
Following the coordinated action, the yen was trading in the 157 area and the currency was set for a broadly flat week at those levels achieved after the intervention.
South Korean won endures longest losing streak since January 2023
Elsewhere in Asia, the South Korean won stood out for its weakness, recording a sixth straight weekly decline - its longest consecutive run since January 2023. The won's prolonged slump reflected spillovers from a global technology sell-off that hammered shares of major Korean tech companies such as Samsung Electronics and SK Hynix.
The article noted that heavy unwinding of single-stock leveraged exchange-traded funds tied to Korean technology names magnified local volatility and helped drive sustained foreign capital outflows, contributing to the won's slide.
Market participants will continue to parse incoming U.S. data and central bank commentary for clues on the timing of any policy moves. The interplay between labor market indicators, inflation dynamics, geopolitical developments, and coordinated currency actions will likely keep FX volatility elevated in the near term.
Contributors to the reporting included Ayushman Ojha and Pranav Kashyap.