The U.S. dollar is on track for a significant weekly decline, marking the steepest drop in nearly three months as a lackluster June jobs report recalibrated market expectations for Federal Reserve interest rate policy. The tepid labor data has pushed back immediate rate hike bets, offering a brief respite for the yen and other major currencies that have recently struggled against the greenback. Softness in the dollar persisted into early Asian trading hours, with the euro holding near a two-week high at $1.1442. The British pound also strengthened, trading at $1.3361 and positioned for a 1.2% weekly gain, representing its best performance in nearly three months. Risk-sensitive currencies also rallied, with the Australian dollar lifting to $0.6935 and snapping a four-week losing streak, while New Zealand’s kiwi rose 1.2% for the week to trade at $0.5702.
The dollar index, which tracks the greenback against a basket of major currencies including the yen and the euro, fell 0.2% to 100.77, following a 0.5% decline on Thursday. This brings the index down 0.58% for the week, representing the largest weekly drop since early April. The shift in currency valuations comes after U.S. job growth cooled sharply in June. Nonfarm payrolls increased by only 57,000, falling well below expectations for a 110,000 rise. Additionally, the labour force participation rate dropped to 61.5%, marking a more than five-year low.
These data points have prompted traders to dial back expectations for a near-term interest rate increase from the Federal Reserve. According to CME FedWatch, markets now price in a 52% chance for a hike at the September meeting, a notable decline from the 64% probability in the prior session. U.S. Treasury yields also pulled back from earlier highs, with those on interest rate-sensitive two-year notes snapping a three-day streak of gains with a 4 basis-point drop.
"At the margin, it is dovish, helping to ease concerns about labour market overheating and the need for more aggressive policy tightening," said Sim Moh Siong, FX strategist at OCBC. However, he noted that the broader outlook remains constructive for the dollar, particularly against low-yielding currencies, as long as Fed tightening expectations stay intact. The Japanese yen last traded at 161.01 per dollar after rallying nearly 1% in the previous session, lifting the currency from multi-decade lows as the greenback wobbled.
Investors remain on high alert for potential intervention after Japanese officials abandoned their previous habit of telegraphing risks. Instead, they are signaling a more targeted campaign to squeeze speculators and raise the cost of betting against the battered yen. Toshihiro Nagahama, a government panel member known as an economic aide to dovish Prime Minister Sanae Takaichi, stated on Thursday that the Bank of Japan should continue to raise interest rates at a moderate pace to rectify excessive yen declines. "The bigger question is what comes next," said Tony Sycamore, an analyst at IG, pointing to the 162.83 level as a short-term top for dollar-yen. "Whether it becomes a more meaningful medium-term high will ultimately depend on incoming U.S. data and, to some degree, developments in the Japanese government bond market."