The U.S. dollar weakened on Thursday, reflecting a volatile week in the markets, as traders assessed a combination of bond market jitters and data signaling a softening labour market. This, in turn, boosted expectations that the Federal Reserve will reduce interest rates later this month.
After the disappointing job openings data, which showed a 10-month low in July, traders have increased their bets on rate cuts. While layoffs remained relatively low, the decrease in job openings has heightened concerns about the labor market, supporting calls for an imminent rate cut.
Key Data to Watch: The Jobs Report
The spotlight is now on Friday’s jobs report, which is expected to further shape the near-term rate outlook. With the Federal Reserve focusing heavily on labor market trends, the upcoming report will be critical in assessing whether the current softening of the job market is significant enough to warrant additional policy adjustments.
The CME FedWatch tool indicates an overwhelming 97% chance of a 25 basis point rate cut in the Fed’s upcoming policy meeting, up from 89% just a week ago. Furthermore, markets are pricing in 139 basis points of rate cuts by the end of next year. This expectation of future easing is supporting a dovish outlook for the dollar.
Currency Moves and Market Reactions
The euro held onto its overnight gains, trading at $1.1657, while the pound was steady at $1.3442 despite a challenging week. The Japanese yen saw a small gain, sitting at 148.12 per dollar. The U.S. Dollar Index (DXY), which tracks the greenback against six other major currencies, stood at 98.178 after dipping by 0.17% on Wednesday.
Several Federal Reserve officials reiterated that labor market concerns are influencing their stance on policy, with many suggesting that rate cuts remain likely in the near future. ING’s Chief International Economist, James Knightley, predicts a series of 25 basis point cuts in the upcoming Fed meetings, starting with the September meeting.
Bond Market and Global Economic Concerns
The global bond market has been in the spotlight this week, with long-end yields rising as investors worry about the fiscal health of major economies, including the U.S., Japan, and the U.K. The rise in bond yields reflects concerns over rising debt-to-GDP ratios in these countries, further raising concerns over their fiscal sustainability.
The increase in yields prompted a rally in U.S. Treasuries, which saw yields on 30-year bonds drop from a high of 5% to 4.891%. Investors are also awaiting the results of Japan’s 30-year government bond auction, a key test of demand for long-term debt.
Focus on Japan and Other Major Economies
The situation is not isolated to the U.S., as Japan’s fiscal situation is also drawing attention. Japan’s 30-year bond yield is hovering near a record high, which has sparked concerns about Japan’s fiscal health.
Analysts are highlighting the challenges these advanced economies face in managing their debt levels. With debt-to-GDP ratios climbing above 100% in many cases, the path forward will require either significant cuts in government spending or increased revenues, all while balancing social and political pressures.
In Other Currencies
The Australian dollar remains steady at $0.6545, while the New Zealand dollar is trading at $0.5881, with both currencies also reacting to the global risk sentiment and the softening U.S. dollar.
As the global financial landscape adjusts to these economic and policy changes, market participants will continue to watch for further signs of divergence between the Fed and other central banks.
Stay updated with Daily Forex Pakistan