(Bloomberg) -- The dollar slumped the most since May as a surprisingly weak US labor report heightened concern about the economic outlook, leading traders to bet on more aggressive Federal Reserve interest-rate cuts this year.
The Bloomberg Dollar Spot Index tumbled 0.7% on Friday as the prospect of Fed easing and diving Treasury yields dimmed the greenback’s appeal. The dollar’s largest decline versus major currencies came against the yen, which had its strongest week since 2022 after the Bank of Japan lifted rates.
The dollar’s slide underscored that investors’ focus was on the relative path of global central banks, outweighing potential demand for the currency as a haven with angst about the economy building. Stocks also sank on the labor-market figures, as did oil — the sort of turbulent backdrop that might support the currency.
“The dollar is indeed in an uncomfortable place as the US rates markets continue to frontload aggressive Fed easing,” said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole. “This is eroding the dollar’s rate advantage and pushing it lower versus its G-10 peers.”
The greenback was buoyed for much of the year as the Fed kept its benchmark rate at the highest in more than two decades, while the economy remained resilient. Friday’s losses pared the Bloomberg Dollar Spot Index’s gain this year to 3%, and the gauge remains just above its 200-day moving average.
Only one G-10 peer - the British pound - has advanced against the greenback in 2024, while commodity currencies and the yen have lagged behind. The yen is still down almost 4% versus the dollar this year. Currencies of commodity exporters - Australia, Canada, New Zealand and Norway - have fared worse, down from 4% to 7%.
Bullish Lifeline
For dollar bulls, there’s the potential that market volatility and economic worries could turn the tide for the greenback, if worsening sentiment amps up demand for the safety of the world’s dominant reserve currency.
“If it’s a US-led global recession that we’re entering, we normally see the dollar weaken first and then it strengthens,” said Adam Farstrup, head of multi-asset, Americas at Schroders.
While a US recession isn’t his base case at the moment, he said that the chances of one have risen after Friday’s data.
Another potential aid for the greenback would be if the Fed eases monetary policy less aggressively than investors and economists now expect. On Friday, futures traders priced in a full percentage point of easing by the end of the year — with only three Fed meetings left in 2024.
“Everything originating in the bond market, that’s what’s driving the FX market,” said Kathleen Brooks, research director at XTB. “Is the market going to be disappointed by the Fed between now and January? That’s going to drive the dollar.”
Bullish sentiment toward the greenback has faded in recent weeks, matching the escalation in expectations that the Fed will follow peers like the Bank of Canada, European Central Bank and Bank of England in easing borrowing costs.
Hedge funds, asset managers and other speculative market players now hold around $15 billion in bullish dollar wagers, according to Commodity Futures Trading Commission data aggregated by Bloomberg for the week through July 30. While that position increased from the week before, it’s still down by more than 50% from a mark of around $33 billion set in April.
“With the slowdown that we’re seeing now in the economic data, it challenges this idea of US exceptionalism and that should be consistent with the dollar reversing its gains against other currencies,” said Sophia Drossos, a strategist at Point72 Asset Management.
(Updates market levels, adds comments and CFTC data.)
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