Labor Market Jitters Weaken The Dollar

(RTTNews) - The U.S. Dollar slipped again during the week ended September 6 amidst renewed rate cut expectations triggered by updates from the labor market. A slew of labor market data released during the week increased the odds of the Fed prioritizing its goal of maximum employment over inflation combat.

As currency markets responded to the developments, the 6-currency Dollar Index ended up weaker as the greenback's strength against the British pound, the Canadian dollar and the Swedish krona did not suffice to eclipse its weakness against the euro, the Japanese yen and the Swiss franc.

The Dollar Index or DXY plunged 0.53 percent during the week ended September 6. The weekly trading ranged between a high of 101.92 touched on Tuesday and a low of 100.59 recorded on Friday.

The ISM Manufacturing PMI data from the U.S. on Tuesday weighed on market sentiment for the greenback at the onset of the holiday-shortened week. The reading for August showed 47.2, rising from 46.8 in July but missing market expectations of 47.5. The larger-than-expected decline in the factory sector and a fifth consecutive month of decline in activity renewed rate cut expectations and dampened the outlook for the U.S. dollar.

Market sentiment was also weighed down by the release of the monthly report on job openings and labor turnover which serves as a demand side indicator of labor shortages at the national level. Data released by the U.S. Bureau of Labor Statistics on Wednesday showed the number of job openings drop to 7.67 million in July from a downwardly revised 7.91 million in June. The lowest reading since January 2021 was way below market forecasts of 8.10 million. A potentially greater focus on the employment situation boosted chances of a higher rate cut by the Fed to revive the labor market, dragging down the index to 101.27 from 101.70 a day earlier.

According to Thursday's ADP report, private businesses in the U.S. added 99 thousand workers to their payrolls in August, the lowest number since January 2021. This compared with a downwardly revised 111 thousand in July and market forecasts of 145 thousand adding to the rate cut euphoria.

However, data released on Thursday by the U.S. Department of Labor showed the number of people claiming unemployment benefits in the U.S. decreasing to 227 thousand for the week ended August 31. Markets had expected the reading at 230 thousand versus 231 thousand in the period ended August 24.

The Institute for Supply Management's assessment of the non-manufacturing activity in the U.S. economy showed a reading of 51.5, edging up from 51.4 recorded in the previous month. The report released on Thursday was expected to reveal a reading of 51.1. Amidst the labor market jitters, the Dollar Index slipped to 101.05 by close on Thursday.

Even as currency markets speculated on whether the labor market deteriorated in August in a way that jeopardized the Fed's mandate of maintaining maximum employment, the monthly payrolls data revealed a mixed picture.

In data released on Friday morning, the U.S. Bureau of Labor Statistics showed additions of 142 thousand to non-farm payrolls during August versus market expectations of 160 thousand and a downwardly revised 89 thousand in July. The unemployment rate edged down as expected to 4.2 percent from 4.3 percent in July.

The average hourly earnings on a month-on-month basis increased to 0.4 percent from 0.2 percent in July and market expectations of 0.3 percent. On a year-on-year basis, the hourly earnings which was seen increasing to 3.7 percent from 3.6 percent in July actually jumped to 3.8 percent.

With a minor rebound on Friday, the Dollar Index eventually closed the week at 101.19, implying weekly losses of more than a half a percent. With the monthly jobs data not endorsing an alarming labor market scenario, markets also toned down the rate cut expectations to a gradual quarter-percent rate cut by the Fed.

The DXY which had closed at 101.73 on the last Friday of August, finished trading at 101.19 on the first Friday of September.

The EUR/USD pair rallied 0.33 percent during the week ended September 6 amidst the greenback's weakness reinforced by Fed rate cut expectations. The pair rose to 1.1083 from 1.1047 a week earlier. The weekly trading ranged between 1.1026 and 1.1155.

The GBP/USD pair edged down to 1.3123 on September 6, from 1.3126 a week earlier. The sterling's weekly trading range was between $1.3086 and $1.3240. Data released during the week had showed an uptick in PMI readings during August.

The Aussie slipped 1.4 percent against the greenback during the week ended September 6. From the level of 0.6764 recorded on August 30, the AUD/USD pair decreased to 0.6670 by September 6. The pair touched a high of 0.6796 on Monday and a low of 0.6659 on Friday. Data released on Tuesday had showed that the Australian economy grew by 0.2 percent q-o-q in the second quarter, missing market forecasts of 0.3 percent.

The Japanese Yen staged a strong rebound against the U.S. Dollar in the backdrop of Bank of Japan's unchanged hawkish stance. Bank of Japan Governor Kazuo Ueda had on Tuesday reiterated that Bank of Japan would continue to raise interest rates if the economy and prices perform as expected by the Bank of Japan. In the wake of the comments, the USD/JPY pair plunged 2.7 percent to close the week ended September 6 at 142.27 versus 146.16 a week earlier. The pair traded between the high of 147.21 on Tuesday and the low of 141.78 on Friday.

Looming on the data horizon are the updates to consumer price inflation and producer price inflation from the U.S. as well as the interest rate decision by the European Central Bank. The Dollar Index is currently at 101.54, gaining 0.36 percent from Friday's close. The EUR/USD pair has slipped 0.41 percent to 1.1037 whereas the GBP/USD pair has shed 0.28 percent to trade at 1.3087. The AUD/USD pair is currently at 0.6662 whereas the USD/JPY pair has jumped 0.48 percent to 142.97.