Dollar slides 0.5% as July payrolls drop 23K, Fed bets shift

The July payrolls report showed the US economy shed 23,000 jobs, sending the dollar lower and pushing Fed rate-hike bets to the back burner.

The US dollar fell as much as 0.5 percent Friday after July non-farm payrolls showed the economy shed 23,000 jobs versus the 80,000 gain economists projected, the first negative print since the pandemic era.

"The big drop that we saw this morning is almost wholly related to the US employment report for July because no one really expected non-farm payrolls to be negative or that there would be a big downward revision in the June numbers," said Thierry Wizman, global FX and rates strategist at Macquarie Group.

The Labor Department also revised the prior two months lower by a combined 103,000 jobs, dragging the three-month average to just 20,000. The unemployment rate fell to 4.1 percent from 4.2 percent, but only because labor force participation dropped to 61.4 percent, the lowest in more than five years. Nearly 1 million workers have left the labor force since May alone. Average hourly earnings rose 0.1 percent month over month, below the 0.3 percent consensus.

The data recalibrated Fed expectations. Markets had priced a 57 percent chance of a September rate hike before the release; that fell to 44 percent afterward. CME FedWatch data showed a 56 percent probability the Fed holds rates in September, up from 45 percent a day earlier. "I'm inclined to think that the market has shifted the Fed hike into October or December instead of September," Wizman said.

The dollar's decline was broad-based. USD/JPY fell 127 pips to 157.14, extending losses from last week's coordinated intervention by Japanese and US authorities that had already pushed the pair to a 13-week low. EUR/USD rose 0.34 percent to touch 1.1577, a seven-week high, completing the measured move of a double-bottom pattern. USD/CAD dropped 65 pips to 1.3948, the lowest since June 15, as Canada's employment report simultaneously showed 75,100 jobs added in July versus the 15,000 expected.

Gold and bonds catch the bid

Gold jumped $122 to $4,360 an ounce, extending a rally that began earlier in the week, as lower rate expectations reduced the opportunity cost of holding the non-yielding metal. The weekly chart shows a sharp bounce after months of selling, with the 78.6 percent Fibonacci retracement of the June-July downswing already breached. Resistance sits at $4,382, with the late-May highs at $4,584 as the next target if that barrier gives way.

US 2-year yields fell 6.8 basis points to 4.17 percent, easing pressure on the bond market and adding a bid for safety in case the economy takes a sudden downturn. The 10-year yield dropped 2.67 basis points to 4.643 percent.

Equity futures turned higher on the data, with S&P 500 futures up 41 points, roughly doubling the pre-market gain, as the lower probability of a rate hike supported valuations. Much of the stock market's focus, however, remains on the AI and technology trade rather than the intricacies of the labor market.

Skepticism over the print

Not everyone is convinced the report reflects a genuine contraction. The ADP private payrolls report earlier in the week showed 44,000 jobs added in July, and the ISM services employment index showed no signs of a sudden drop in hiring. The weakness may be concentrated in specific sectors rather than broad-based.

The more concerning trend, however, is the exodus from the labor force. With participation at 61.4 percent and nearly 1 million workers lost since May, the debate over what constitutes "full employment" in the US is likely to intensify. It was not long ago that some Fed officials argued 20,000 monthly job gains were sufficient given aging demographics and low immigration. Whether they still hold that view will shape the policy path into the September meeting.

This article is for informational purposes only and does not constitute investment advice.