Yen Surges on Weak US Jobs Data, Intervention Risk; Dollar Index Posts Weekly Decline

The dollar weakened 0.57% to 157.56 yen on Friday, according to market data, shedding gains made in the aftermath of a historic intervention last week that had pushed the greenback to a 13-week low. The euro rose 0.39% to $1.1568.

The moves came after the Labor Department reported that nonfarm payrolls fell by 23,000 in July, well below the 80,000 increase economists had expected. Previously reported job gains for the prior two months were also revised sharply lower. The unemployment rate fell to 4.1% from 4.2% in June, but only because workers left the labor force — the participation rate dropped to a near five-and-a-half year low of 61.4%.

Traders reacted by slashing expectations for a Fed rate hike at the September meeting. Fed funds futures priced in a 44% probability of an increase, according to the CME's FedWatch tool, down from 55% before the data and from 67% a week ago.

Bond markets moved sharply. The two-year note yield, which tracks Fed rate expectations, fell 4.35 basis points to 4.202%. The yield on the 10-year Treasury dropped to 4.64%, down from 4.67% just prior to the jobs report.

“If you look at all the data components, wages, (nonfarm payrolls), this is a very weak labor market that's all of a sudden happened,” said Tom di Galoma, managing director of global rates trading at Mischler Financial Group, as reported by the Economic Times. “It takes the Fed off the hiking table.”

The weak data reinforced the case for a more dovish Fed stance and amplified dollar weakness that had already been triggered by last week's rare intervention by Japanese and US authorities. A report from the Economic Times noted that the dollar had plunged to a 13-week low after that action before partially recovering. Friday's slide revived concerns that further intervention could follow if the yen strengthens too quickly.

“I think no one really expected nonfarm payrolls to be negative or that there would be a big downward revision in the June numbers,” Thierry Wizman, global FX and rates strategist at Macquarie Group, told the Economic Times. “Any time you see a print that suggests the US economy is weak or that the labor market is not as strong as otherwise thought, they effectively push out the prospect of a Fed rate hike.”

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.44% to 99.50 and was on track for its second consecutive weekly decline, according to Economic Times data.

Broader markets cheered the implications of a slower economy and the reduced likelihood of tighter policy. European equities rallied to a record close, with the STOXX 600 up 0.3%, and US stocks also rose sharply. The S&P 500 gained 0.6% to a record close of 7,757.64, the Dow rose 0.3% to 54,036.93, and the Nasdaq composite jumped 1.3% to 26,690.62.

The bond market's dovish reaction partly reflected investor interpretations that a weaker labor market gives the Fed more room to hold off on further tightening. “Although the stock market is likely to welcome the dovish implications of the report, investors should be wary of the future growth potential of an economy where fewer people are working,” said Peter Graf, chief investment officer at Amova Asset Management Americas, in a research note reported by RTHK.

The report also complicated the Fed's balancing act. “Today's weak payrolls print may ease the pressure on the Fed to raise rates at its September meeting, but next week's inflation data will still likely be the deciding factor,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, as reported by RTHK.

Consumer price inflation data for July due next week will be closely watched. Economists expect the CPI to show an annual rise of 3.4%, according to RTHK, a slight easing from 3.5% in June. Oil prices driven higher by the ongoing Iran conflict remain a key upside risk to inflation and could complicate the Fed's decision, the Economic Times reported.