Dollar slides as yen surges despite Fed rate hike bets

The U.S. economy added 162,000 jobs in August, nearly tripling the consensus forecast and reigniting expectations that the Federal Reserve will raise interest rates later this month. The labor market surprise, reported by the Bureau of Labor Statistics last Friday, has reshaped the monetary policy outlook across global markets heading into a week packed with inflation data and central bank decisions.reuters+1

Jobs Surge Shifts Fed Calculus

August nonfarm payrolls came in at 162,000, far exceeding the roughly 55,000 gain economists had expected, while July's initially reported decline of 23,000 was revised upward to a gain of 21,000. The unemployment rate held steady at 4.1%. The household survey was even more striking, showing an employment increase of 569,000 and a surge of 683,000 into the labor force, according to CNBC.cnbc+2

Money markets quickly repriced the odds of a quarter-point hike at the Fed's September 15-16 meeting to around 60%, according to futures data tracked by Prime Terminal and the CME Group's FedWatch tool. That probability had already been climbing since Fed Chairman Kevin Warsh's hawkish speech at Jackson Hole in late August, which initially pushed hike odds above 57%.tmgm+4

Global Ripple Effects

The strong jobs data lifted U.S. Treasury yields and supported the dollar, while weighing on gold and risk-sensitive currencies. Gold fell more than 0.40% on Monday, trading near $4,412, as higher rate expectations eroded the appeal of the non-yielding metal. The New Zealand dollar dropped 0.54% against the greenback on Monday, pressured by the hawkish Fed repricing and disappointing Chinese trade data.tradingkey+1

The dollar index slipped to a two-week low on Tuesday, however, as strength in the Japanese yen — which rallied to a 6.5-month high on upwardly revised Q2 GDP data and speculation around the Government Pension Investment Fund's bond allocation — offset the greenback's rate-driven support.barchart

Inflation Week Looms

Markets now turn to a critical stretch of U.S. data. The Producer Price Index is due Thursday, followed by the Consumer Price Index on Friday — readings that will likely determine whether the Fed follows through on tightening at its September meeting. The European Central Bank is widely expected to deliver a 25-basis-point hike at its September 10 meeting, with markets pricing in near-certainty of an increase, according to Reuters. The Bank of Japan is also seen raising rates at its September 18 meeting, with markets discounting a 97% probability of a hike.reuters+2

Geopolitical tensions added another layer of complexity, as weekend U.S. strikes on Iranian tankers near the Strait of Hormuz pushed crude oil prices more than 2% higher, fueling energy-linked inflation concerns that could further complicate central bank decisions worldwide.tmgm+1