USD Weakens After Surprise Drop in U.S. Non-Farm Payrolls; Dollar Posts Second Weekly Loss

The U.S. dollar softened against major currencies on Friday (7th), following the unexpected decline in U.S. non-farm employment for July, which triggered market concerns about the resilience of the U.S. economy and undermined the rationale for a Federal Reserve (Fed) rate hike, dragging down the dollar.

In late New York trading, the ICE U.S. Dollar Index (DXY), which tracks the dollar against six major currencies, fell 0.44%, to around 99.50, marking a weekly decline of 0.31%—its second consecutive week of losses.

According to the U.S. Labor Department, non-farm employment in July decreased by 23,000, sharply contrasting with the Reuters survey of economists who expected an increase of 80,000. The unemployment rate dipped to 4.1%, but the labor force participation rate slid to 61.4%, the lowest level in nearly five and a half years.

After the release of the employment report, the dollar-yen pair depreciated 0.57% to 157.56 yen, although it still gained approximately 0.10% for the week. Due to last week’s historic joint intervention by U.S. and Japanese authorities, the dollar-yen briefly hit a 13-week low.

The euro rose 0.39% against the dollar to 1.1568, posting a weekly gain of 0.41%.

The dollar's weakness reflects cooling market expectations for a Fed rate hike. According to the CME Group's FedWatch tool, the market now assigns a 56% probability that the Fed will hold rates steady in September, up from 45% the previous day.

Thierry Wizman, Global FX and Interest Rate Strategist at Macquarie Group, said: "I don't think anyone really expected non-farm payrolls to turn negative, nor did they expect June's employment data to be significantly revised downward."

He added: "I tend to believe the market has pushed back the timing of the Fed's rate hike from September to October or December. Whenever data shows the U.S. economy is weakening, or the labor market isn't as strong as previously thought, the market pushes back the potential timing of a Fed rate hike."

U.S. Treasury yields plunged after the release of the employment report. The 2-year Treasury yield, which typically follows Fed rate expectations, dropped 4.2 basis points to 4.245%. The benchmark 10-year Treasury yield also fell 2 basis points to 4.649%.

As of around 6:00 a.m. Taiwan time on Saturday (8th), prices were:

Dollar Index: 99.5996 (-0.03438%) Euro/Dollar (EUR/USD): 1 EUR = 1.1557 USD (+0.29%) Pound/Dollar (GBP/USD): 1 GBP = 1.3492 USD (+0.28%) Australian Dollar/Dollar (AUD/USD): 1 AUD = 0.7065 USD (+0.47%) Dollar/Canadian Dollar (USD/CAD): 1 USD = 1.3935 CAD (-0.56%) Dollar/Yen (USD/JPY): 1 USD = 157.76 JPY (-0.43%)