Dollar Holds Firm Ahead of Key Jobs Report

The dollar index fell 0.5% to 99.4 on Friday, near a two-month low, after weaker-than-expected US employment data reduced expectations that the Federal Reserve will need to raise interest rates in the near term. Nonfarm payrolls unexpectedly fell by 23,000 in July, while substantial downward revisions to the previous two months pointed to a weakening labor market. The unemployment rate edged down to 4.1%, although labor force participation continued to decline. The data reinforced concerns that employment conditions are deteriorating amid persistent price pressures and uncertainty linked to the Iran conflict, while also increasing the likelihood that the Fed could delay further tightening. Investors subsequently reduced bets on a September rate hike. Meanwhile, President Donald Trump said negotiations between Iran and Oman over the Strait of Hormuz were “moving along,” although no agreement has been finalized.

The dollar index was little changed around 99.95 on Friday after rebounding in the previous session, as investors cautiously awaited the closely watched July jobs report for fresh signals on labor market strength and the outlook for Federal Reserve monetary policy. Fed officials have increasingly signaled they are prepared to raise interest rates soon amid mounting inflationary pressures, with markets pricing in a 25-basis-point hike in September. The Financial Times reported that Chair Kevin Warsh would be willing to raise rates next month if inflation readings in the coming weeks remain elevated. The Fed chief is also expected to maintain his stripped-back communication style despite criticism from financial markets. Meanwhile, the dollar drew additional support from a rebound in oil prices as renewed tensions in the Strait of Hormuz reignited concerns over inflation and the interest rate outlook.

The dollar index edged up to 99.8 on Thursday but remained close to a seven-week low as investors balanced optimism over developments in the Middle East with caution ahead of Friday's closely watched US jobs report. Iran said it had reached an agreement with Oman on a proposed shipping route through the Strait of Hormuz, raising hopes that energy flows through the critical waterway could resume. However, a broader US-Iran agreement remains uncertain, with President Donald Trump saying negotiations were ongoing and that he would “see what happens.” Attention has also shifted to the upcoming nonfarm payrolls report, which is expected to provide fresh insight into the strength of the US labor market and the Federal Reserve's policy outlook. A stronger-than-expected employment reading would likely reinforce expectations of further interest rate hikes, while a weaker report could prompt markets to scale back tightening bets and reduce upward pressure on Treasury yields.