The dollar extended its downward trajectory in Thursday trading as Federal Reserve rate cuts are increasingly expected and the US labor market is not looking pretty either. Investors are also losing faith in the influence and independence of monetary institutions, which has not been helped by the highly visible recent interventions made by President Donald Trump.
Markets settled in to digest the recent payroll numbers which predictably disappointed and the expected rise in initial jobless claims. Traders are almost solely focused on the indication of a Fed rate ‘cut’ at the upcoming policy meeting. As doubts grow about the Fed itself with the ongoing nomination process from Trump to fill the vacancy on the Fed Board and the potential change in Chair Jerome Powell, the dollar continues to weaken. These developments reflect growing worry over the independence and direction of US monetary policy.
Fed Rate Cut Bets Surge as US Job Market Stumbles
The dollar sharply declined after last week’s troubling US nonfarm payrolls report. Job creation in July was still below analyst estimates, along with the data for July and June was revised down. This created more worries about the health of the labor market and increased expectations for loosening monetary policy.
Economists expect that the Labor Department will report an increase in unemployment claims. Last week, initial claims likely increased to 221,000, an increase of 3,000. Continued claims also seem to be increasing which adds to the convincing narrative that labor market conditions are degrading faster than the Fed anticipated.
Fed funds futures see a 94% chance that we will see a 25 basis point cut in September, which is a dramatic increase from 48% just one week ago. In total, markets are expecting more than 60 basis points of cuts by year-end. These expectations have put the greenback on the defensive, especially as other central banks around the world are also considering their own policy changes.
Political Risks and Trump’s Fed Appointments Shake Confidence
Adding to investor unease, political tensions are now intersecting with economic policy. President Trump recently fired a top labor statistics official over data he criticized. His upcoming nomination to the Fed Board, along with the shortlist to replace Jerome Powell, has raised alarms about institutional independence.
Tony Sycamore of IG noted that the political environment is creating fresh risks around the dollar. The combination of weak US jobs data and perceived interference in the Fed’s leadership adds to downward pressure. Confidence in the dollar weakens as markets question whether policy will remain focused on data or shift toward political goals.
Trump may also meet with Russian President Vladimir Putin next week, signaling a new round of global diplomacy. The White House continues to push for an end to the war in Ukraine, and any resolution there could benefit the euro more than the dollar.
Sterling Steady, Euro Finds Strength, Yen Stable
The pound traded at $1.3365 and looked set to end five straight days of gains. Traders expect the Bank of England to announce its fifth rate cut of the year later today. However, rising inflation could divide policymakers and create doubts about future rate moves.
The euro moved up slightly to $1.1671. Hopes for peace talks in Ukraine, possibly next week, gave support to the currency. Analysts believe any diplomatic progress could push the euro higher in the coming sessions.
The dollar traded at 147.35 yen as the Japanese currency stayed stuck in a narrow range. Mixed signals from the US and weak local drivers kept the yen steady. New Zealand’s kiwi rose 0.4% to $0.5950. China’s yuan held firm after strong trade data and a better-than-expected reference rate from the central bank.
Markets Eye Broader Impact as Dollar Slides
Across the globe, investors are re-positioning portfolios as the dollar weakens. After an impressive resilience in equity markets, the Nasdaq was buoyed by tech stocks – notably Apple – and was up over 1%. Bitcoin lost a little steam, slipping back 0.5% to be at $114,499. Not extreme by any means, but the market is still cautious no doubt.
With further economic data coming up, markets are curious as to how the Fed will respond. Not only from economic metrics, but they also will feel pressure politically. If the jobs picture continues to deteriorate as these appointments occur, the dollar may face further losses.
Taxpayers are now left waiting to hear if Trump will nominate a replacement for Fed Governor Adriana Kugler, along with potential announcements relating to Powell’s replacement. These appointments may change the definitions of how monetary policy will operate over the next twelve months.
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