Dollar Retreats as Weak US Reports Bolster Fed Rate Cut Hopes

Rich Asplund - Barchart - Fri May 3, 2:29PM CDT

The dollar index (DXY00) on Friday fell to a 3-week low and finished down by -0.25%. The dollar sank Friday as T-note yields retreated on the weaker-than-expected reports on US Apr nonfarm payrolls and the Apr ISM services index. The weak reports boost the chances of the Fed cutting interest rates this year, a bearish factor for the dollar. Also, Friday’s stock rally reduced the liquidity demand for the dollar. The dollar recovered from its worst levels Friday based on hawkish comments from Fed Governor Bowman, who said she was "willing to hike" interest rates if inflation stalled or reversed.

US Apr nonfarm payrolls rose +175,000, below expectations of +240,000 and the smallest increase in 6 months. The Apr unemployment rate unexpectedly rose +0.1 to 3.9%, showing a weaker labor market than expectations of no change at 3.8%.

US Apr average hourly earnings rose +0.2% m/m and +3.9% y/y, weaker than expectations of +0.3% m/m and +4.0% y/y with the +3.9% y/y gain the smallest annual increase in 2-3/4 years.

The US Apr ISM services index unexpectedly fell -2.0 to 49.4, weaker than expectations of an increase to 52.0 and the steepest pace of contraction in 16 months. The Apr ISM services prices paid sub-index rose +5.8 to 59.2, stronger than expectations of 55.0.

Fed Governor Bowman said inflation will likely remain elevated for "some time," and she's "willing to hike" interest rates if inflation stalls or reverses.

The markets are discounting the chances for a -25 bp rate cut at 10% for the June 11-12 FOMC meeting and 38% for the following meeting on July 30-31.

EUR/USD (^EURUSD) Friday rose to a 3-week high and finished up by +0.40%. The main bullish factor for the euro Friday was dollar weakness after the weaker-than-expected US reports on Apr payrolls and Apr ISM services bolstered the chances of the Fed cutting interest rates.

The Eurozone Mar unemployment rate was unchanged at 6.5%, right on expectations.

Swaps are discounting the chances of a -25 bp rate cut by the ECB at 96% for its next meeting on June 6.

USD/JPY (^USDJPY) on Friday fell by -0.50%. The yen rallied Friday to a 3-week high against the dollar on speculation that Japanese authorities may step into the currency market again to support the yen. According to Bloomberg estimates, the BOJ intervened in the forex market Wednesday for about 3.5 trillion yen ($22.6 billion), the second time this week Japan has intervened in the currency market to support the yen. The yen recovered sharply from a 34-year low against the dollar on Monday after Japan intervened in the forex market to stem the yen’s slide. Gains in the yen accelerated Friday after T-note yields tumbled on weaker-than-expected US reports on Apr nonfarm payrolls and the Apr ISM services index.

Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 11% for the June 14 meeting.

June gold (GCM4) Friday closed down -1.0 (-0.04%), and July silver (SIN24) closed down -0.139 (-0.52%). Precious metals gave up an early advance on Friday and posted modest losses, with gold falling to a 1-month low. Precious metals prices turned lower Friday on hawkish comments from Fed Governor Bowman, who said she's "willing to hike" interest rates if inflation stalls or reverses. Strength in stocks on Friday has also curbed safe-haven demand for precious metals. In addition, fund liquidation is weighing down gold prices after long gold holdings in ETFs fell to a 4-1/2 year low Thursday.

Precious metals Friday initially moved higher after the dollar index dropped to a 3-week low. Also, lower global bond yields Friday were supportive of precious metals. In addition, Friday’s weaker-than-expected US Apr unemployment and Apr ISM services index reports boost the chances for the Fed to begin cutting interest rates and are bullish for metals.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.