"Dollar Holds Steady on U.S. Jobs Data, Yen Set for First Weekly Decline in Six"

The U.S. dollar held steady near a one-week high against major global currencies on Friday, buoyed by the largest drop in U.S. jobless claims in nearly a year. This unexpected decline in unemployment applications eased concerns about a potential economic downturn, reinforcing confidence in the U.S. economy.

The dollar maintained its strength against the Japanese yen after a three-day recovery, bolstered by rising U.S. Treasury yields. The better-than-anticipated employment figures released on Thursday led to a reduction in market expectations for the Federal Reserve to implement interest rate cuts this year.

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Safe-Haven Currencies Weaken as Risk Appetite Grows

The yen, along with the Swiss franc—both considered safe-haven currencies—hovered near one-week lows as global stock markets in Asia and Europe experienced gains. In contrast, risk-sensitive currencies like the Australian dollar and the British pound edged higher, reflecting the market’s improved risk sentiment.

This week has been marked by significant market volatility, initially triggered by softer-than-expected U.S. payrolls data from the previous week. This report had led to a sharp selloff in global stocks while driving up demand for safe-haven currencies, pushing the yen and the franc to their highest levels since early January.

UBS FX strategist Yvan Berthoux commented on the shifting market dynamics, stating, “The potential for a purely risk-on environment, favoring carry trades in forex, is less compelling for the second half of this year. Our forecasts are more conservative for dollar/yen and euro/Swiss franc pairs.”

Berthoux added, “We don’t foresee a significant further unwinding of positions. The market correction has been substantial, and we anticipate further downside risk.”

Dollar’s Weekly Performance and Fed Rate Expectations

As of 0837 GMT on Friday, the dollar had eased by 0.1% to 147.175 yen, positioning it for a 0.5% weekly gain, which would mark its first weekly advance in six weeks. Similarly, against the Swiss franc, the dollar dipped by 0.1% to 0.8656 franc, though it remained on track for a 1% weekly rise.

Thursday’s data showing a larger-than-expected drop in new U.S. unemployment claims calmed fears of a deteriorating labor market, suggesting that the economy’s gradual cooling remains on course. This data also influenced expectations for the Federal Reserve’s next policy move. According to the CME Group’s FedWatch Tool, the likelihood of a 50-basis point interest rate cut at the Fed’s September 17-18 meeting fell to 54%, down from 69% the previous day. Meanwhile, the probability of a 25-basis point cut increased to 46%.

Yen’s Rally Pauses Amid Market Adjustments

The yen had surged earlier this month, reaching its strongest level since January 2 at 141.675 per dollar on Monday. This rally was driven by an unwinding of short positions, accelerated by a surprise rate hike from the Bank of Japan and weaker U.S. economic indicators.

Later on Friday, the Commodity Futures Trading Commission (CFTC) was expected to release data providing further insight into the extent of recent yen buying activity.

Dollar Index and Other Currency Movements

The dollar index, which tracks the greenback against a basket of six major currencies, slipped 0.1% to 103.19 after three consecutive days of gains.

The euro was marginally lower at $1.09165 but remained up by 0.1% for the week. Earlier in the week, the euro had reached $1.1009, its highest level since January 2.

Sterling also edged up 0.1% to $1.2767 following a 0.49% rally on Thursday that pulled it back from a more than one-month low. However, it was still set for a 0.4% decline for the week, marking its fourth consecutive weekly drop.

The Australian dollar remained stable at $0.65930, having earlier reached $0.6605 for the first time since July 24, bolstered by hawkish comments from the Reserve Bank of Australia governor. The Aussie was up 1.24% for the week.

The New Zealand dollar climbed to a three-week high of $0.6035 before slightly retreating to $0.6023. This rise occurred despite a drop in inflation expectations, which led traders to price in an 80% chance of a quarter-point rate cut by the Reserve Bank of New Zealand at its upcoming policy meeting on Wednesday.

Bitcoin Surges Amid Broader Market Gains

In the cryptocurrency market, Bitcoin reached a one-week high of $62,717 before settling around $61,042, up 2.6% for the day. For the week, Bitcoin was up approximately 3.2%, reflecting the broader market’s positive sentiment.

FAQs

Why did the dollar rise this week?
The dollar strengthened this week due to a significant drop in U.S. jobless claims, which eased fears of an economic downturn and reduced expectations for aggressive Federal Reserve interest rate cuts.

How did the yen and Swiss franc perform against the dollar?
Both the yen and Swiss franc weakened against the dollar, as improving market sentiment led to a decline in demand for safe-haven currencies.

What impact did the U.S. unemployment data have on the markets?
The lower-than-expected U.S. jobless claims reassured investors about the labor market’s stability, reducing concerns about an imminent economic slowdown and influencing Federal Reserve rate cut expectations.

How did other currencies like the euro and sterling fare?
The euro and sterling experienced minor fluctuations, with the euro slightly lower but up for the week, while sterling recovered from a monthly low but still faced a weekly decline.

What was the market reaction to the Reserve Bank of Australia’s comments?
The Australian dollar gained strength after hawkish comments from the Reserve Bank of Australia governor, indicating potential future rate hikes, which supported the currency.

Why did Bitcoin rise this week?
Bitcoin’s rise this week was likely driven by overall positive sentiment in financial markets, as investors moved into riskier assets amidst a more stable economic outlook.

Conclusion

The dollar’s resilience this week underscores its status as a safe haven amid fluctuating global market conditions. As U.S. employment data reassures investors, and with the Federal Reserve’s next moves under close scrutiny, the forex market remains poised for further developments.