Dollar Drops As Fed-led Gains Vanish After Jobs Data

The week ended July 7 witnessed the U.S. dollar weakening against most major currencies amidst mixed updates from the U.S. labor market that eclipsed the hawkish sentiment triggered by FOMC minutes released on Wednesday.

Data released by the U.S. Bureau of Labor Statistics on Friday showed the U.S. economy added 209 thousand jobs in June 2023 versus market expectations of 225 thousand. Figures for May were revised lower by 33 thousand to 306 thousand. As expected, the unemployment rate dropped to 3.6 percent from 3.7 percent earlier.

The average hourly wages (on a month-on-month basis) which was seen falling to 0.3 percent however remained steady at 0.4 percent. The average hourly wages (on a year-on-year basis) which was falling to 4.2 percent also remained steady at 4.4 percent.

Data released on Thursday by ADP Inc. had indicated that private businesses in the U.S. created 497 thousand jobs in June 2023, the most since February 2022, and well above forecasts of 228 thousand. Also, the JOLTs Job Openings Report for May had revealed 9.8 million vacancies, versus 10.32 million a month earlier and expectations of 9.9 million.

Earlier, the ISM Services PMI reading for June had recorded 53.9, rising from 50.3 a month earlier and much higher than the expectations of 51.

Though the minutes of the Fed released on Wednesday revealed a unanimous decision to skip a rate hike, the hawkish guidance had dampened sentiment. The minutes revealed that all participants continued to anticipate that, with inflation still well above the FOMC’s 2 percent goal and the labor market remaining very tight, maintaining a restrictive stance for monetary policy was considered appropriate to achieve the Committee’s objectives.

The mixed economic updates that came after the FOMC minutes however caused markets to tone down expectations of another rate hike in November, leading the dollar to weaken against major currencies over the course of the week.

The DXY or the Dollar Index which measures the dollar’s strength against a basket of 6 currencies lost 0.62 percent during the week spanning July 3-7. The DXY closed Friday’s trading at 102.27, versus 102.91 a week earlier. From the high of 103.39 touched on Wednesday the DXY dropped to a low of 102.23 on Friday.

The dollar depreciated against the euro over the course of the past week as hawkish tone by ECB officials offset weak sentiment triggered by the drop in industrial production in Germany. The EUR/USD pair increased a little over half percent during the week to close at 1.0967, from the level of 1.0910 a week earlier. The pair which had dropped to as low as 1.0833 on Thursday rebounded to touch a high of 1.0975 on Friday.

The sterling gained more than 1 percent against the greenback during the course of the past week, helped by Bank of England’s indication of further rate hikes. The GBP/USD pair increased from 1.2704 to 1.2836 between June 30 and July 7. The pair which had touched a low of 1.2658 on Monday rallied to a high of 1.2851 by Friday.

The Australian dollar gained around 0.33 percent against the U.S. dollar over the course of the past week. The AUD/USD pair dropped from the high of 0.6707 on Tuesday amidst the Reserve Bank of Australia’s unexpected pause and weaker-than-expected services sector readings for June. The pair touched a low of 0.6599 on Thursday. The pair closed at 0.6688, versus the level of 0.6666 a week earlier, as stronger-than-expected trade data for the month of May supported a rebound.

The past week also witnessed the Japanese yen strengthening more than one and half percent against the U.S. dollar, supported by speculations of government intervention. The USD/JPY pair closed at 142.07 on July 7, versus the level of 144.32 on June 30. The pair dropped from the high of 144.96 on Monday to a low of 142.07 on Friday.

Data released over the weekend showed inflation in China lower than expected. Meanwhile, market focus has shifted to the CPI readings from the U.S. due on Wednesday. Markets are expecting the headline CPI to fall to 3.1 percent, from 4 percent in the previous month. Core inflation is seen falling to 5 percent, from 5.3 percent earlier. The Dollar Index has however increased 0.04 percent to 102.31.

The other currency pairs have also taken cognizance of the dollar’s potential movements ahead of the CPI readings. The EUR/USD pair has increased to 1.0979. The GBP/USD pair has declined to 1.2806. The AUD/USD pair has also slipped to 0.6661. The USD/JPY pair has fallen to 141.61.

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