The U.S. dollar index slid to a seven-week low on Friday and finished down 0.41%, after a surprise weakening in the U.S. labor market lowered expectations for near-term Federal Reserve tightening. The dollar’s retreat helped lift major currency pairs, while precious metals jumped as investors priced a more dovish policy outlook. Separate developments in Germany and Japan also provided support for the euro and capped downside in the yen.
Key takeaways
- Dollar weakens: The dollar index fell 0.41% to a seven-week low as U.S. payrolls missed expectations and wage growth came in softer.
- Catalyst: July nonfarm payrolls unexpectedly declined and average hourly earnings increased less than forecast, reducing the perceived case for a September rate hike.
- Implication for FX: The euro strengthened to a seven-week high, while the yen benefited from lower Treasury yields but remained constrained by Japan–U.S. interest-rate differentials.
- Metals rally: Gold and silver posted sharp gains, supported by the weaker dollar and reported central-bank buying.
What drove the dollar’s drop
Friday’s currency move was anchored to the U.S. jobs report. July nonfarm payrolls fell by 23,000, against expectations for an increase of 80,000, marking the first decline in five months. June payrolls were revised lower to a 20,000 gain from the previously reported 57,000 increase.
Wages also moderated. Data showed average hourly earnings rose 0.1% month over month and 3.2% year over year, both below expectations of 0.3% m/m and 3.5% y/y. At the same time, the unemployment rate unexpectedly fell by 0.1 percentage point to 4.1%, a 13-month low, indicating the labor market remained relatively firm even as job growth cooled.
These dynamics shifted expectations for Federal Reserve policy. According to the report, the probability of a 25 basis point rate hike at the next FOMC meeting on September 15–16 dropped to 44% from 58% before the payroll release. The softer growth and wage print contributed to a more dovish pricing of the path for rates.
Dollar reaction: stocks, Fed odds, and support from regional Fed messaging
In addition to the labor data, the dollar’s slide was reinforced by the broader market backdrop. Friday’s stock rally, according to the report, reduced liquidity demand for the greenback. However, the dollar also found some support after comments from St. Louis Fed President Alberto Musalem, who said policymakers should not tolerate higher inflation and emphasized the need for monetary policy to restrain underlying inflation.
Still, the rate-cutting narrative dominated into the close, keeping the dollar under pressure into the weekend.
FX spillovers: euro up, yen down, and why
Euro strengthens on U.S. data and Germany trade. EUR/USD climbed to a seven-week high and finished up 0.36% on Friday. The report attributed the euro’s strength primarily to the dollar’s tumble following the weaker U.S. payroll data. Additional support came from better-than-expected German trade and industrial signals.
Data cited in the report showed German June industrial production rose 0.2% month over month, matching expectations. More importantly for the currency, German exports rose 0.9% m/m versus expectations of 0.5% m/m, while imports increased 4.4% m/m compared with expectations of 2.0% m/m. These figures reinforced demand-side momentum in Germany’s external sector.
Rate expectations in Europe also factored into the trade. According to the report, markets were pricing an 85% chance of a 25 bp ECB rate hike at the ECB’s next policy meeting on September 10.
Yen rises as yields fall, but interest-rate gaps remain a headwind. USD/JPY fell 0.57% on Friday, with the yen strengthening as the dollar retreated on the U.S. payroll release and Treasury yields moved lower. The report also noted that the yen weakened after crude oil prices moved higher, a development that is typically bearish for Japan because Japan imports more than 90% of its energy.
Near-term support for the yen comes from the possibility of continued U.S. engagement in currency markets. The report pointed to comments from Treasury Secretary Bessent this week saying the U.S. would “not hesitate” to repeat action in the forex market to support the yen if needed.
Despite the improvement, the yen remains exposed to rate differentials. The report said markets were discounting only a 66% chance of a 25 bp Bank of Japan hike at its September 18 meeting, with Japan’s current policy rate at 1.00% compared with the Fed’s federal funds target range of 3.50%–3.75%.
Gold and silver jump as the dollar weakens
Precious metals gained sharply. According to the report, October COMEX gold (GCV26) closed up 99.10, or 2.32%, and September COMEX silver (SIU26) finished up 1.893, or 3.07%.
The rally was driven largely by the dollar’s decline after the payroll report knocked it to a seven-week low. The same labor-market components that pressured the dollar—an unexpected drop in nonfarm payrolls and a smaller-than-expected increase in average hourly earnings—also fed expectations that the Fed could ease policy. That pricing is generally supportive for gold and silver because lower expected real yields tend to reduce the opportunity cost of holding non-yielding bullion.
The report also cited demand from China’s central bank. It said the PBOC added 640,000 ounces of gold to its reserves in the prior month, the largest increase in more than 2.5 years. Strong central bank buying can provide a floor under prices even when broader investor flows fluctuate.
At the same time, the report flagged that recent fund liquidation is a near-term risk. It said long holdings in gold ETFs fell to a 10-month low last Monday after reaching a 3.5-year high on February 27. It also noted long silver ETF holdings fell to a 1-year low on July 14 from a 3.5-year high posted on December 23. While central bank accumulation supported the market, reduced ETF exposure can limit upside follow-through.
What to watch next
With the dollar, rates expectations, and metal prices now closely tied to incoming U.S. data, investors will look for the next set of economic prints and Fed communications to confirm whether the market’s lower odds for a September hike persist. For FX, attention also turns to upcoming policy decisions from the ECB and the BOJ, while metals may react to further evidence of central bank demand and signs of whether ETF outflows stabilize.
