Dollar Declines as U.S. Jobs Report Fuels Rate Cut Expectations

The value of the U.S. dollar fell on Monday following a disappointing jobs report that heightened expectations for an interest rate cut by the Federal Reserve later this month. This decline occurred concurrently with a retreat of the Japanese yen, which weakened after the announcement of Prime Minister Shigeru Ishiba‘s resignation over the weekend, creating a climate of uncertainty in Japan.

In Europe, the euro remained relatively stable despite the French parliament’s decision to oust Prime Minister Francois Bayrou. The vote, which resulted from tensions over efforts to address the nation’s soaring debt, has plunged France, the second-largest economy in the eurozone, deeper into a political crisis. The euro was last reported at $1.1751, reflecting a modest increase of 0.2 percent against the dollar.

The market’s primary focus remained on the U.S. dollar, which reacted strongly to Friday’s non-farm payrolls report. This data indicated a sharp decline in U.S. job growth for August and an increase in the unemployment rate to 4.3 percent, the highest level in nearly four years. According to LSEG estimates, futures markets are currently pricing in a 90 percent chance of a standard 25 basis-point interest rate cut and a 10 percent likelihood of a more aggressive 50 basis-point reduction.

Marc Chandler, chief market strategist at Bannockburn Forex in New York, emphasized that the dollar’s performance is primarily driven by U.S. economic developments rather than foreign politics. “The real driver of dollar/yen is not Japanese politics or Japanese interest rates. It’s U.S. interest rates, and with the market pricing in about a 10 percent chance of a 50 basis-point cut, the dollar is falling,” he stated.

The dollar index dipped by 0.4 percent to 97.51, having already declined over 0.5 percent last Friday. Against the Swiss franc, the dollar fell to its lowest level since July 24, settling at 0.7937, down 0.5 percent.

Market Reactions and Future Outlook

Looking ahead, Juan Perez, director of trading at Monex USA in Washington, expressed a potential for a surprising uptick in the dollar. He noted that upcoming inflation figures, particularly the Producer Price Index (PPI) and Consumer Price Index (CPI), could indicate rising prices that might alter market sentiment.

In other currency movements, the yen experienced significant losses against the euro, dropping to its lowest value in over a year. The euro was last seen at 173.40 yen, up 0.4 percent. Investors are also contemplating the appointment of Ishiba’s successor, with speculation surrounding candidates who may favor looser fiscal and monetary policies.

Japanese markets reflected these uncertainties as stocks surged while government bond yields remained stable. Notably, yields on super-long Japanese government bonds hovered near record highs. Despite the political turbulence, data released on Monday indicated that Japan’s economy expanded more rapidly than previously estimated in the second quarter.

Meanwhile, the British pound rose by 0.3 percent against the dollar, trading at $1.3545, while the Australian and New Zealand dollars appreciated by 0.5 percent to US$0.6590 and 0.8 percent to US$0.5938, respectively.

In a broader context, U.S. Treasury Secretary Scott Bessent has called for a renewed examination of the Federal Reserve’s policies, including its authority to set interest rates. This comes as President Donald Trump considers candidates to replace Fed Chair Jerome Powell, whom he has criticized for not implementing more aggressive rate cuts.

As market participants navigate the evolving landscape, the interplay between U.S. economic indicators and international political developments will remain critical in shaping currency movements.