The US Dollar Index (DXY) was weaker on Thursday after softer US Nonfarm Payrolls data reduced expectations of a near-term Federal Reserve rate hike. The gauge, which measures the dollar against six major currencies, traded near 100.88 after touching a two-week low of 100.56 earlier in the US session. Pressure also came from a sharp rebound in the Japanese Yen, following speculation of official action after USD/JPY reached a 40-year high; Japan’s Finance Ministry gave no comment on the move.
US Bureau of Labor Statistics figures showed payrolls rose by 57K in June versus forecasts of 110K, while May was revised to 129K from 172K. Other parts of the report were firmer: unemployment fell to 4.2% from 4.3%, and Average Hourly Earnings increased 0.3% MoM and 3.5% YoY, in line with expectations. CME FedWatch put the implied probability of a September hike at 53%, down from 63% pre-release. Oil prices have fallen in recent weeks, easing inflation concerns, while indirect US-Iran talks in Doha ended with “positive progress” reported by Qatari mediators but no breakthrough. San Francisco Fed President Mary Daly said policy remained “slightly restrictive” and pointed to scenarios involving either inflation risks or slowing growth.
Dollar Outlook After Weak Jobs Data
Based on the weak US jobs report from this morning, we see the US Dollar remaining under pressure for the next few weeks. The economy adding only 57,000 jobs, far below the 110,000 expected, significantly lowers the chance of a Federal Reserve rate hike in September. This pushes us to favor strategies that will profit from a weaker, or at least a range-bound, dollar.
We are paying close attention to the CME FedWatch tool, which now shows only a 53% probability of a September hike, down from 63% just yesterday. Historically, such a sharp drop in rate expectations following a major data miss can lead to several weeks of dollar underperformance. The downward revision of May’s job numbers also confirms a cooling trend in the labor market, strengthening this view.
However, the picture is not entirely clear, which suggests volatility could rise. The unemployment rate unexpectedly dropping to 4.2% and wages growing at a solid 3.5% will prevent the Fed from turning completely dovish. We believe this will put a floor under the dollar, making selling rallies a more prudent strategy than establishing outright short positions.
Strategic Responses and Positioning
The sudden strength in the Japanese Yen is a critical new factor, especially with the USD/JPY pair recently hitting a 40-year high. The risk of further intervention by Japanese authorities is now extremely high, making long USD/JPY positions very risky. We are therefore considering put options on USD/JPY to protect against, or profit from, another sharp downward move.
Falling oil prices, with Brent crude dropping from nearly $85 to $75 a barrel over the past month, also support our view. This eases inflation fears and gives the Fed more breathing room to pause its rate hikes. While we are watching the US-Iran talks, the jobs data is the primary driver for our dollar outlook right now.
Given this mix of signals, we feel that selling call options on the US Dollar Index (DXY) with a strike price around the 102 level is a sensible strategy. This position profits if the dollar stays flat or drifts lower, which seems the most likely path. We are also exploring call options on currencies that benefit from dollar weakness, such as the Euro and the Japanese Yen.
