Dollar falls to a four-month low on weak U.S. jobs data.

The U.S. dollar fell to a four-month low on Friday following the release of a weaker-than-expected jobs report for July.

This report has raised expectations that the Federal Reserve will cut interest rates by 50 basis points in September amid signs of a weakening economy.

Employers added 114,000 jobs in July, well below expectations for an increase of 175,000. In addition, the unemployment rate rose to 4.31YTD3Q, beating economists' forecasts that it would remain at 4.11YTD3Q.

Traders now rate a 71% probability that the Fed will cut rates by 50 basis points in September, compared with 31% before the data release and 22% on Thursday, according to the CME Group's FedWatch tool. A cut of at least 25 basis points is already fully discounted for September, and a total reduction of 116 basis points is expected by year-end.

"This is the market reacting to a concern about economic growth. The market is starting to realize that the economy is really slowing down," said Wasif Latif, president and chief investment officer of Sarmaya Partners in Princeton, N.J. "The market is starting to realize that the economy is really slowing down," he said.

The dollar index fell 1.1% to 103.21, touching a low of 103.12, the lowest since March 14. This is the largest single-day percentage drop since November.

Treasury yields also fell, with interest rate-sensitive two-year bond yields dropping to 3.845%, the lowest level since May 2023. Yields on 10-year bonds hit a low of 3.79% for the first time since Dec. 27.

The U.S. Labor Department indicated that Hurricane Beryl, which made landfall in Texas on July 8, had "no discernible effect" on employment data, dismissing a theory that could have explained the weakness.

"There is no upside anywhere, as far as I know. They say there were no effects from the hurricane, and if there were, they're not enough to offset the weakness we're seeing," commented Steve Englander, head of global G10 currency research at Standard Chartered's New York branch.

However, some economists are not convinced that Beryl had no impact and saw some bright spots in Friday's employment data.

The Fed kept interest rates unchanged at the conclusion of its two-day meeting on Wednesday, with Fed Chairman Jerome Powell indicating that interest rates could be cut as soon as September if the U.S. economy follows its expected trajectory.

Chicago Fed President Austan Goolsbee said Friday that the U.S. central bank should move in a "steady" manner, showing slight resistance against the market's assessment for rate cuts.

Weaker employment data, a weak manufacturing report and some disappointing corporate outlooks in recent days have heightened fears that the economy is deteriorating at a faster pace.

However, despite Friday's weak employment report, Englander notes that "most other indicators are not consistent with a really strong slowdown at this point...Everything is soft, but nothing is catastrophically soft."

Upcoming economic releases will be watched even more closely to confirm whether the growth outlook is as bad as feared.

The dollar weakened 1.84% to 146.62 Japanese yen, touching a low of 146.42, the lowest since February 2.

The yen has gained value since hitting a 38-year low of 161.96 against the dollar on July 3, boosted by interventions by Japanese authorities and the unwinding of carry trades in which yen assets were sold and dollar assets were bought.

The yen received an additional boost on Wednesday when the Bank of Japan raised rates to 0.25%, the highest level since 2008.

The Japanese yen and Swiss franc were also boosted by safe-haven demand amid falling equities and geopolitical concerns.

The funeral of Hamas leader Ismail Haniyeh was held in Qatar on Friday following his assassination two days ago in Tehran, Iran, raising concerns among investors about a possible wider conflict in the Middle East.

The dollar weakened 1.58% to 0.859 Swiss francs, the lowest level since Feb. 2. The euro gained 1.12% to $1.0912 and reached $1.0927, the highest level since July 18.

Sterling strengthened 0.53% to $1.2807, recovering from a one-month low after the Bank of England cut interest rates on Thursday from a 16-year high.

The decline of the U.S. dollar has significant implications for Mexico's import market. A weaker dollar can reduce the cost of dollar-denominated imports, which could benefit Mexican companies that rely on goods and services imported from the United States. This can translate into lower production costs and, potentially, more competitive prices for consumers.

However, economic uncertainty and expectations of rate cuts by the Federal Reserve may also affect business confidence and investment. Companies that depend on international trade should be alert to currency fluctuations and global economic conditions, as a weakened U.S. economy may have spillover effects on demand for Mexican products.

In addition, changes in U.S. interest rates may influence the Bank of Mexico's monetary policies. A rate cut in the U.S. could pressure Mexico to adjust its own interest rates to maintain competitiveness and economic stability.

In summary, while a weaker dollar may offer short-term benefits for the Mexican import market, companies must prepare for a complex and dynamic global economic environment.

Collaboration: Grupo Auge | Reuters (International).