U.S. Dollar Weakens as Treasury Yields Decline Ahead of Payrolls Data Release

On Thursday, the U.S. dollar experienced a decline in value, mirroring the retreat in Treasury yields. This provided some much-needed relief for the Japanese yen and the euro. The drop occurred just before the release of a significant U.S. nonfarm payrolls report, which could play a pivotal role in determining whether the Federal Reserve will raise interest rates next month.

James McCann, the Deputy Chief Economist at abrdn in Boston, suggested that the dollar was undergoing a certain degree of consolidation following its recent sharp gains. He added, "Certainly, from a longer-term perspective, the dollar does appear somewhat overvalued. When it reaches such high levels, there's potential for profit-taking in certain trades. The same applies to Treasury yields; there's a bit of consolidation there."

After reaching an 11-month high earlier in the week, the dollar index, which measures the value of the greenback against six other currencies (including the euro and yen), dropped by 0.4% to 106.34. Investors shifted their focus to the forthcoming release of the U.S. Labor Department's September jobs report scheduled for Friday.

In a Reuters poll, economists predicted an increase of 170,000 jobs, down from 187,000 in the previous month, while the unemployment rate is expected to decrease from 3.8% to 3.7%. Data from Wednesday indicated that U.S. private payrolls had increased less than anticipated last month.

Although analysts noted that more evidence was needed to gauge the speed at which the U.S. labor market was cooling, the money markets have priced in an 80% probability that the Fed will maintain its benchmark overnight interest rate, as per the CME's FedWatch tool. A month ago, these odds stood at 55%.

Longer-dated U.S. Treasury yields moved away from their 16-year highs, while the yen, which is sensitive to U.S. yields, traded at 148.39 per U.S. dollar, marking a 0.5% increase. This came after it hit 150.165 on Tuesday, its weakest level since October 2022.

Amo Sahota, Director at consulting firm Klarity FX in San Francisco, stated, "The fall in yields doesn't alter the overall trajectory in the currency market. I believe we need to witness a more significant decline in U.S. yields to truly diminish some of the dollar's strength."

The euro saw a 0.4% increase, rising to $1.0551, following a fall to $1.0448 earlier in the week, marking its lowest point this year.

Peter Kazimir, a European Central Bank policymaker, suggested that the ECB's rate hike last month was likely the final one in its current tightening cycle, although the central bank would need to await more data before making a final determination.

**Intervention Watch**

The sharp rebound of the yen after breaching the 150-per-dollar level earlier in the week triggered speculation about possible intervention to support the currency. However, data from the Bank of Japan's money market on Thursday indicated that Japanese authorities probably did not intervene.

Japan's Finance Minister, Shunichi Suzuki, declined to comment on whether Tokyo had intervened and reiterated that currency rates must reflect fundamentals and move in a stable manner.

Apart from lower U.S. Treasury yields, the yen also gained support from a decline in oil prices, though market participants expect this relief to be short-lived. UniCredit strategists stated that the risk of Japanese intervention persists at current yen levels.

The British pound experienced a 0.5% increase against the dollar, reaching $1.2190, following a decline on Wednesday to its lowest point since March. Bank of England Deputy Governor Ben Broadbent expressed uncertainty regarding the need for further interest rate increases.