Dollar Dips on Disappointing Nonfarm Payroll, Supported by Price Data

Today's release of a range of US economic data caused the US dollar to fluctuate sharply.

The US dollar tumbled to its lowest level in three weeks in Friday's trading (May 3) following a disappointing US labor market data release. However, the US Dollar Index (DXY) has since rebounded from its low of 104.52 to around 105.00.

US labor market data for April 2024 showed a wage and job growth slowdown. Nonfarm Payrolls came in at only 175k, below the consensus estimate of 238k. The US unemployment rate unexpectedly increased from 3.8% to 3.9%, while Average Hourly Earnings grew by only 0.2% monthly compared to the estimated 0.3%.

Market participants see these data as supporting expectations for the Fed to cut interest rates twice this year, with the total projection for rate cuts increasing from 42 to 49 basis points. However, experts remain skeptical.

Some experts argue that the current labor market data is not significant enough to prompt immediate action from the Fed. They suggest that the Fed will likely only consider rate cuts if weakness in the labor market persists.

"An unemployment rate of 3.9 per cent is not something disastrous. This indicates an economy that is not declining dramatically, but it definitely indicates a looser labor market," said Jason Pride, Head of Investment Strategy and Research at Glenmede, as quoted by Reuters, "It gives the Fed some hope, but it does not establish the trend for them."

Other data released by the ISM indicates that the US service sector contracted in April 2024, as seen in the decline of the US Non-Manufacturing PMI score from 51.4 to 49.4. However, the price sub-index jumped from 53.4 to 59.2, suggesting ongoing inflation concerns.

The US dollar typically weakens as expectations for Fed rate cuts increase but strengthens when the market believes interest rates will remain high. Today's diverse data presents a dilemma, with the DXY wavering around 105.00 at the time of writing.

Traders will likely consider which data is more relevant to the current US economy next week. They will continue to look for clues from the latest US economic data and speeches by Fed officials to predict the direction of Fed interest rates and the US dollar.