The dollar started the week where Friday’s jobs report left it. The dollar index, which tracks the greenback against six major currencies, sat near 99.6 on Monday morning — its weakest level since 2 June. The euro traded around $1.1558, close to its highest since mid-June. Sterling held near $1.3490, a five-week high. The yen changed hands around 157.90, well clear of the multi-decade low near 164 it touched late last month.
The cause was Friday’s payrolls print. US employers shed 23,000 jobs in July against a consensus looking for a gain of 83,000, and revisions took a combined 103,000 off the May and June counts — dragging the 12-month average down to roughly 34,000 jobs a month. Futures markets now put the odds of a Federal Reserve rate increase in September at about 44%, down from roughly 67% a week earlier. The 10-year Treasury yield eased to around 4.637%.
Then Monday morning happened. Iran said it will not fully reopen the Strait of Hormuz until Washington lifts sanctions, releases frozen assets, ends restrictions on Iranian ports and compensates for war damages. Brent crude rose about 2.5% to roughly $84.50 a barrel; WTI added about 2.6% to around $79.10. US equity futures went nowhere — Dow futures off 0.12%, S&P 500 futures up 0.04%, Nasdaq 100 futures up 0.14%. Gold hovered near $4,340.
The two trades don’t agree
Currency traders have taken the clearest position of anyone in the market right now: they are selling the dollar because they believe a cracking labour market takes the September hike off the table. Oil traders spent the same morning putting a supply-risk premium back into the barrel. Each move is rational on its own. Together they describe two different inflation paths.
That gap matters more than usual, because the hike is not a market invention. On 29 July the Fed held the funds rate at 3.50%–3.75% on a 9–3 vote. The three dissenters — Cleveland’s Beth Hammack, Minneapolis’s Neel Kashkari and Dallas’s Lorie Logan — all wanted a quarter-point increase, pointing to inflation that has run above the 2% target for more than five years. It was the first time since September 2016 that three policymakers dissented in the same direction.
Those three are watching prices, not payrolls. And here is the awkward part of the currency market’s bet: a cheaper dollar makes imports dearer, and a firmer barrel lifts headline inflation directly. The trade against a September hike quietly strengthens the case for one.
Our take: The FX market has made the boldest single call on the Fed of any asset class this week, and it made it off a labour number rather than a price number. That is defensible — three months of near-zero job growth is a real signal, not noise. It is also one-sided. Wednesday’s CPI is the first inflation reading since three Fed officials publicly broke ranks to ask for a hike, and it lands into a barrel that just got more expensive. If you buy inputs abroad or bill customers overseas, the dollar leg is the part of this that reaches your P&L first — and it has already moved. That repricing does not wait for the Fed to confirm it.
What to watch
- July CPI, Wednesday at 8:30 a.m. ET. Headline is expected above 3% year on year; core is forecast to rise 0.2% on the month and ease to roughly 2.5% annually from 2.6% in June. The split between those two numbers is the whole argument.
- PPI on Thursday, retail sales on Friday. The confirmation set. A hot CPI that PPI does not back up is a very different week from one where both run warm.
- Whether Iran’s conditions become an actual agreement. Oil is repricing off statements right now, not shipments.
- The yen near 158. It got there partly on intervention and has already handed some of that back. A slide toward 164 reopens a separate problem.
- The Reserve Bank of Australia on Tuesday, widely expected to hold its benchmark at 4.35%.
Markets usually disagree about the Fed’s timing. This week they disagree about the direction. Wednesday at 8:30 settles it for at least a month.