Dollar falls as traders bet on more rate cuts
With no major U.S. economic releases on Wednesday traders continued to focus on the implications from Friday's jobs report.
U.S. employment growth was weaker than expected in July while the nonfarm payrolls count for the prior two months was revised down by a massive 258,000 jobs, suggesting a sharp deterioration in labor market conditions.
The greenback fell sharply after the report, paring gains from what had been a relatively strong July for the currency, the first month this year in which the dollar index posted a gain.
'We had the first dollar bounce under Trump's second term, and many people thought that maybe it had some legs, but I think Friday's jobs data killed it,' said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. 'The renewed speculation of not only a cut in September, but another cut at the end of the year, has capped the dollar's bounce.'
Fed funds futures traders are now pricing in an 89% probability of a 25 basis point cut at the Fed's September meeting, up from 48% a week ago, according to the CME Group's FedWatch Tool. In total, traders see 58 basis points in cuts this year.
The Fed may need to cut interest rates in the near term in response to a slowing U.S. economy, even though it remains unclear whether tariffs will continue to push inflation higher, Minneapolis Fed President Neel Kashkari said on Wednesday.
The dollar added to its drop on Friday after U.S. President Donald Trump fired a top Labor Department official, alleging data manipulation.
The dollar index was last down 0.33% on the day at 98.41 and reached 98.36, the lowest since July 28. It posted a 1.35% drop on Friday, the largest one day fall since April.
The euro rose 0.47% to $1.1628 and got as high as $1.1636, the highest since July 28. It recorded a 1.48% gain on Friday.
Investors are also focused on Trump's expected nomination to fill a coming vacancy on the Federal Reserve's Board of Governors and the candidates for the next Fed Chair.
Trump said on Tuesday he would decide on a nominee to replace outgoing Fed Governor Adriana Kugler by the end of the week and had separately narrowed the possible replacements for Fed Chair Jerome Powell to a short list of four.
Trump said he has narrowed his list of candidates to replace Powell to economic adviser Kevin Hassett, former Fed governor and Trump supporter Kevin Warsh, and two other people. Trump did not name those people, but one is thought to be current Fed Governor Christopher Waller.
'From what we can ascertain, Warsh seems to be the most hawkish of the three, while Waller is clearly the most dovish, having dissented at the last FOMC meeting, so any shift in the odds towards the latter would likely be bearish for the dollar,' Matthew Ryan, Head of Market Strategy at Ebury said in a note.
The dollar fell 0.21% to 147.3 yen . It fell 2.24% against the Japanese currency on Friday, the largest daily drop since January 2023.
The greenback pared earlier gains against the Japanese currency after Taro Kono, touted as a candidate to become the next prime minister, said that Japan must balance its budget and push the central bank to raise interest rates to alleviate concern over the country's finances.
Ruling party heavyweight Ken Saito, meanwhile, told Reuters that The Bank of Japan must be cautious about raising interest rates given the expected hit from U.S. tariffs on the fragile economy.
Sterling rose 0.19% to $1.3323 before the Bank of England on Thursday is expected to cut interest rates by 25 basis points.
In cryptocurrencies, bitcoin gained 0.56% to $114,293.
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