US Dollar extends decline as NFP takes centre stage
- The US Dollar slides below 99.00 on Thursday, hitting its lowest level in more than a week.
- A pullback in Treasury yields and Waller’s less-hawkish remarks weigh on the Greenback.
- Friday’s NFP report could decide whether the Dollar rebounds or extends its decline.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, slides below 99.00 to its lowest level in over a week on Thursday. At the time of writing, DXY trades around 98.90, down 0.67% on the day, after reaching 99.86 on Wednesday.
A sharp rally in the Japanese Yen (JPY) leads the Greenback’s decline. USD/JPY falls for the second consecutive day, down around 2% at the time of writing and trading near 155.45, its lowest level in a month and close to the post-July coordinated intervention low of 155.24. The Yen’s quick move has sparked fresh intervention speculation, including talk of a possible rate check, but there has been no confirmation from Japanese authorities.
A modest pullback in US Treasury yields also weighs on the US Dollar. Yields retreat across the curve from recent highs, with the benchmark 10-year yield trading around 4.75% after touching 4.81% on Wednesday, its highest level since October 2023.
Selling pressure on the Greenback gathered pace following less-hawkish comments from Federal Reserve (Fed) Governor Christopher Waller, prompting traders to scale back bets on a rate hike at the September 15-16 meeting. Waller said he is “finally seeing some signs of disinflation,” adding: “Give disinflation a chance; we can wait one meeting.” However, he warned that if the trend reverses in August, he would be “willing to pull the trigger on a rate hike.”
According to the CME FedWatch Tool, the probability of a rate hike at the September meeting has fallen to around 50% from 63% a day earlier.
Traders largely shrug off Thursday’s US economic data. Initial Jobless Claims rose to 206K, slightly above expectations of 205K, while the ISM Services Purchasing Managers Index (PMI) increased to 55.4 in August from 54.1 in July, beating the market forecast of 54.3.
The US Dollar now faces a crucial test from Friday’s Nonfarm Payrolls report
The US economy is expected to add 58K jobs in August after shedding 23K in July, while the unemployment rate is forecast to hold at 4.1%. Markets will also closely examine wage growth and revisions to previous payroll figures after employment gains for May and June were revised down by a combined 103K in the July report.
A stronger-than-expected report could revive expectations of a September rate hike and help the US Dollar regain ground. Conversely, another weak payroll print or sharp downward revisions would strengthen the case for the Fed to keep rates unchanged, leaving DXY vulnerable to a deeper decline.
All this comes against a fragile market backdrop after fresh hostilities in the Middle East earlier this week kept Oil prices elevated. Higher energy costs could slow the disinflation process and complicate the Fed’s decision, with inflation still running above its 2% target.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
