The dollar extended its decline, falling for a third consecutive day, as currency markets braced for the release of US payrolls data that could dictate the size of the Federal Reserve’s anticipated interest-rate cut this month. Amid mounting speculation that a disappointing jobs report could prompt the Fed to slash rates by 50 basis points, the greenback struggled, while most Asian currencies, led by the yen, strengthened in response.
This week’s US jobs report has stirred unprecedented levels of anticipation among currency traders, with volatility gauges for the dollar against its major counterparts reaching their highest levels since March 2023. Risk reversals—a key measure of market positioning—reveal a growing bearish sentiment towards the dollar, with many traders opting to avoid short-term bets altogether due to the heightened uncertainty.
Interest-rate swap contracts are currently pricing in about a 35% probability of a 50 basis-point rate cut at the Federal Reserve’s meeting on September 17-18. Despite this, a 25 basis-point reduction remains the prevailing expectation among traders and economists alike.
The yen is poised for significant movement if the US payrolls data tilts expectations towards a more aggressive rate cut by the Fed. Analysts suggest the yen could test its August highs against the dollar, particularly if the unemployment rate ticks up to 4.4%, a scenario that would likely spell trouble for the greenback. The yen “is where the action will be” if the jobs data surprises, with potential for sharp gains against the dollar.
Adding to the day’s uncertainty, traders are also awaiting remarks from two key Federal Reserve officials, New York Fed President John Williams and Fed Governor Christopher Waller, who are scheduled to speak following the release of the payrolls numbers. Their comments will be scrutinized for any clues on the Fed’s policy trajectory.
In the commodities market, oil was on track for its largest weekly loss in nearly a year, weighed down by concerns over weak demand and ample supply, even as OPEC+ announced a two-month delay in its planned output increase. Meanwhile, gold prices remained steady, as traders assessed the latest US economic data, awaiting further direction from the upcoming jobs report.
As markets approach the highly anticipated payrolls release, the dollar’s trajectory remains uncertain, with potential for significant swings depending on the outcome. The interplay between US labor market data and Federal Reserve policy will be crucial in shaping the near-term outlook for global currencies and commodities.