Dollar slides 0.5% as weak payrolls data fuels rate-cut bets

The dollar slumped 0.5% Thursday after weaker-than-expected June payrolls data reinforced bets the Federal Reserve will hold rates steady, sending the ICE Dollar Index to a three-week low.

"The labor market has found its feet after last year, which was the worst year for jobs creation in twenty years," Enda Curran, macro strategist at Bloomberg, said. "Job openings came in at around 7,600,000 for the month of May. That's above the revised figure for April, above the 7,300,000 that economists were expecting."

The ICE Dollar Index fell as low as 100.558 immediately after the 8:30 a.m. release in New York, before settling at 100.890, down 0.50%. The Bloomberg Dollar Index dropped 0.43% to 1219.52. Nonfarm payrolls grew less than forecast in June, while the unemployment rate edged down to 4.2% from 4.3% — a decline driven by a drop in labor force participation rather than stronger hiring, according to the Bureau of Labor Statistics.

The data reshapes the rate outlook ahead of the Fed's July 28-29 meeting. As recently as last month, CME FedWatch data showed a 50% probability of a quarter-point hike to 3.75-4.0% at the September meeting. That bet now looks less certain. Goldman Sachs Asset Management has penciled in 75 basis points of cuts by year-end, contingent on continued softness in job growth. A hotter-than-expected June CPI print on July 15 could reverse the dovish repricing.

The dollar's decline Thursday marked a sharp reversal from its recent strength. The greenback had gained 2.49% over the past month and 3.24% over the past six months, supported by safe-haven demand as tensions in the Middle East escalated and expectations that higher oil prices would keep inflation elevated.

Private Sector Hiring Slows

Private sector hiring slowed sharply in June, with the manufacturing sector flat over the second quarter and leisure and hospitality swinging from gains to a decline of 61,000 jobs, according to the BLS establishment survey. Total nonfarm payrolls hit 159,001 thousand in May, the highest reading in 30 months, after a 2025 that saw the entire year compressed between 158,268 and 158,548 thousand.

Average hourly earnings continued to climb, reaching $37.53 in May, up from $36.28 a year earlier, keeping the Fed cautious even as the headline payroll number disappointed. Every month of 2026 has posted a fresh high for wages, a trend that complicates the case for rate cuts.

The household survey told a more nuanced story. The unemployment rate fell to 4.2% from 4.3%, but the improvement came as the labor force participation rate declined — meaning fewer people were looking for work, not that more had found it. The Sahm Rule recession indicator stood at 0.10 as of May, well below the 0.50 threshold that signals a downturn.

Dollar Outlook Hinges on CPI

The near-term direction for the dollar now depends on the June CPI report due July 15. If core inflation prints above expectations, the repricing of rate-cut expectations could unwind, pushing the dollar back toward its recent highs. If inflation moderates, the dollar could extend its decline as markets price in a more accommodative Fed.

Longer-term structural headwinds also cloud the greenback's outlook. A survey by the Official Monetary and Financial Institutions Forum found that more central banks now expect to reduce rather than increase their dollar holdings over the next decade, the first time the survey has recorded such a shift. Approximately 79% of central banks expect the global monetary system to become increasingly multipolar, according to the survey. A net 30% of respondents plan to increase their gold holdings over the next one to two years, a trend that could gradually reduce reliance on the dollar.

This article is for informational purposes only and does not constitute investment advice.