The U.S. dollar weakened on Thursday as traders increased expectations for a significant interest rate cut by the Federal Reserve later this month. Meanwhile, the Japanese yen emerged as a top performer amid renewed safe-haven demand, driven by concerns over the U.S. economic growth outlook.
Global financial markets have been unsettled, with stock prices particularly affected, following weaker-than-anticipated U.S. economic data released earlier this week. These reports have reignited fears that the economic growth of the world’s largest economy may be slower than previously projected, and that the labor market may be cooling more rapidly than expected.
As a result, investors have been shifting away from riskier assets towards safer options, with the yen benefiting significantly from this trend. The Japanese currency was last up 0.26%, trading at 143.56 per dollar, and has already gained nearly 2% this week.
Similarly, the Swiss franc, another traditional safe-haven currency, remained steady at 0.8461 per dollar. However, its weekly gain of 0.46% has been more modest compared to the yen’s performance.
“The markets are becoming anxious,” said Hemant Mishr, Chief Investment Officer at S CUBE Capital in Singapore. “There was a time when the markets focused only on positive news. Now, there is a noticeable shift as markets begin to focus on negative news, leading to rationalized sell-offs.”
U.S. data released on Wednesday showed that job openings in July dropped to their lowest in three and a half years, suggesting a slowdown in the labor market. This came after Tuesday’s ISM manufacturing survey indicated continued contraction.
“July’s job openings data showed few signs that the cooling in the labor market is coming to an end,” economists at Wells Fargo noted. “For the Fed, this data reaffirms that the labor market is no longer a source of inflationary pressure for the U.S. economy.”
Investors have increasingly focused on U.S. labor market data due to the Fed’s emphasis on maintaining its health. In early Asian trading, the dollar continued its decline, with the euro steady at $1.1083 and the British pound little changed at $1.3147. The dollar index, which measures the currency against a basket of others, slipped slightly to 101.25.
Traders are now pricing in a higher probability of a significant rate cut, as shown by the CME FedWatch tool. However, attention remains fixed on Friday’s nonfarm payrolls report, with expectations that the U.S. economy will have added 160,000 jobs in August, up from 114,000 in July. The unemployment rate is anticipated to ease slightly to 4.2%.
“We estimate Friday’s number will be around 4.2% to 4.3%. If it exceeds 4.5%, people might start expecting a 50 basis point cut,” Mishr added, referring to the unemployment rate.
Elsewhere, the Australian and New Zealand dollars were under pressure from the risk-averse market sentiment on Thursday. The Australian dollar slipped 0.15% to $0.67155, while the New Zealand dollar was down 0.2% at $0.6186.
