Dollar headed for worst day since April-end

The U.S. dollar index dropped 0.5% to 100.86

The U.S. dollar on Thursday was headed for its worst day since the end of April, as a softer-than-anticipated jobs report dented central bank rate hike expectations. Meanwhile, the yen saw its best day against the dollar since the beginning of May, as traders anticipated potential intervention from Tokyo.

At 19:56 GMT, the U.S. dollar index dropped 0.5% to 100.86.

This week’s data pointed to an overall resilient employment situation and had implications for the central bank. The central bank last month indicated that, with the labour market holding steady, it was now largely focused on bringing down inflation, though new central bank Chair Kevin Warsh also said that policymakers would drop forward guidance going forward.

Traders had pushed up their expectations of interest rate hikes at the height of the oil shock, but with inflationary pressures now easing and a resilient labour market, the central bank has more breathing room to potentially keep interest rates on hold and not tighten monetary policy.

Market participants reacted in kind, with the CME FedWatch tool showing a decrease in odds for rate hikes and a tick up in odds for keeping rates steady. Rate-sensitive shorter-end Treasury yields dropped.

Higher rate environments generally tend to strengthen the dollar.

The immediate implication of the June jobs report for the Fed is dovish, since job growth was slower than expected and makes the labour market’s case for rate hikes less urgent. Beyond the next few months, the shortfall of labour supply to labour demand is the report’s more important hawkish implication. The longer current trends continue and push the unemployment rate down, the stronger the job market’s case for higher rates will eventually become, Bill Adams, chief U.S. economist at Fifth Third Commercial Bank, said.

Near-term, June’s drop in prices of gasoline and other energy products and cool payrolls growth make rate hikes less urgent from the Fed’s perspective. On balance, the central bank still looks likely to hold rates steady at the next decision in late July, he added.