- The dollar hit a four-month low on Friday after the US nonfarm payrolls report.
- Investors are pricing an 80% chance of a 50-bps Fed rate cut in September.
- Middle East tensions are still alive, increasing demand for safe-haven assets.
Currency futures gained on Friday as the dollar fell after a downbeat jobs report raised the likelihood of a 50-bps Fed rate cut in September. However, the tides had shifted by Monday morning, and the dollar was on the front foot. Investors bought safe-haven assets, including the dollar and the yen, amid economic and geopolitical uncertainty.
US job growth (Bureau of Labor Statistics)
The dollar hit a four-month low on Friday after the US nonfarm payrolls report. According to the Labor Department, the economy created 114,000 more jobs in July. Meanwhile, economists had expected an additional 175,000 jobs. Furthermore, the unemployment rate increased to 4.3%, beating forecasts of 4.1%.
The employment figures intensified fears of a rapid slowdown in the US economy. Earlier in the week, data had shown a drop in manufacturing activity to an eight-month low. Consequently, after Friday’s figures, the market panicked, and Fed rate cut expectations surged.
Notably, the likelihood of a 50-bps cut in September rose from 31% before the jobs report to 71%. However, investors were pricing an 80% chance by Monday amid fears of a recession.
Increased rate cut expectations weighed on the dollar on Friday. However, by Monday, the dollar became one of the safe places for investors to hide. Therefore, most currency futures apart from the yen fell.
Apart from the deteriorating labor market and manufacturing sector, markets were worried about recent poor earnings. Technology companies have reported weak earnings, leading to a drop in earnings expectations. As a result, stocks have sold off as traders dump risky assets.
Furthermore, Middle East tensions are still alive, increasing demand for safe-haven assets. The risk of retaliation after the recent killing in Iran has increased. Consequently, the US has stepped in and is ready to use its military to control the situation.
The yen has benefited the most from the recent turmoil in the markets. US Treasury yields have plunged due to increased rate-cut bets, boosting Japan’s currency. At the same time, the yen has benefited from safe-haven inflows due to Middle East tensions.
Meanwhile, other major currencies, like the pound, reversed Friday’s gains. Moreover, as Fed bets rose, the likelihood of more rate cuts from other major central banks increased.
