Dollar's Decline Deepens as U.S. Labor Market Flashes Warning Signs

The U.S. dollar weakened on Thursday, continuing a volatile week as investors responded to signs of a softening labor market. This has significantly bolstered expectations that the Federal Reserve will implement an interest rate cut this month. With the central bank closely monitoring employment data, the upcoming jobs report on Friday is now a pivotal event that could determine the near-term path for monetary policy.

New data released on Wednesday showed that job openings fell to their lowest level in 10 months in July, reinforcing a view of a weakening labor market. This softer-than-expected data has put downward pressure on the dollar, while the euro and Japanese yen have seen gains. The euro held its ground, trading at $1.165775, while the yen was last at 148.12 per dollar. The dollar index, which measures the U.S. currency against six other major currencies, stood at 98.178 after a slight decline.

Market traders are now pricing in a high probability—more than 90%—that the Fed will lower interest rates at its upcoming meeting. This is a noticeable increase from the 89% chance a week earlier, according to CME FedWatch. Analysts are also anticipating a total of 139 basis points of rate reductions by the end of the next year. Several Federal Reserve officials have recently expressed concerns about the labor market, suggesting that rate cuts are still a likely course of action. James Knightley, ING's chief international economist, stated that the Fed is very likely to cut rates in the coming months, forecasting a 25 basis point reduction at the September, October, and December FOMC meetings.

The focus this week has not been limited to currency markets. Global bond yields on long-term notes have risen, fueled by investor anxiety over the fiscal health of major economies, including the United States and Japan. However, the Federal Reserve's recent dovish commentary and the weak labor data prompted a rally in Treasuries, pushing yields lower. The yield on the U.S. 30-year bond fell to 4.891% after briefly reaching 5%, its highest in roughly a month and a half.

Investor attention is also on the Japanese bond market, with an upcoming auction of 30-year government bonds serving as a key test of investor appetite. The yield on Japan’s 30-year government bond stood at 3.27%, just shy of its recent record high. Uday Patnaik, head of Asia fixed income at L&G, noted that the rise in yields reflects "poor fiscal conditions" in some of the world's largest advanced economies, where the debt-to-GDP ratio is approaching or surpassing 100%. He explained that these countries lack a primary surplus, meaning government revenues cannot even cover non-interest spending, which could necessitate significant spending cuts or new revenue sources amid high social and political pressures.