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Sunday, August 3, 2025

Dollar Sinks and Gold Surges as Fed Rate Cut Chances Increase


The dollar index (DXY00) on Friday retreated from a 2-month high and fell by -0.95%.  The dollar tumbled Friday after the Jul payroll report showed the US labor market cooled more than expected, bolstering speculation the Fed may cut interest rates as soon as next month.  Losses in the dollar accelerated after the Jul ISM manufacturing index contracted by the most in 9 months.  The chance of a Fed rate cut at the September FOMC meeting rose to 84% from 40% before today’s payroll and ISM reports were released.

The dollar initially rallied to a 2-month high Friday on an increase in safe-haven demand after world equity markets tumbled on concern that President Trump’s tariff policies would derail the global economy.  Friday’s sell-off in stocks has also boosted some liquidity demand for the dollar.

US Jul nonfarm payrolls rose by +73,000, weaker than expectations of +104,000, and Jun nonfarm payrolls were revised downward to +14,000 from the previously reported +147,000.  The Jul unemployment rate rose +0.1 to 4.2%, right on expectations.

US Jul average hourly earnings rose +3.9% y/y, stronger than expectations of +3.8% y/y.

The US Jul ISM manufacturing index unexpectedly fell -1.0 to 48.0, weaker than expectations of an increase to 49.5 and the steepest pace of contraction in 9 months.

US Jun construction spending unexpectedly fell -0.4% m/m, weaker than expectations of no change.

The University of Michigan US Jul consumer sentiment index was revised lower to 61.7 from 61.8, weaker than expectations of an upward revision to 62.0.

Atlanta Fed President Raphael Bostic said inflation is still further from target than employment, and he’s not ready to increase projections for 2025 interest rate cuts.

Cleveland Fed President Beth Hammack said the US labor market still appears healthy, though today’s fresh job numbers constituted a “disappointing report to be sure.”

In the latest tariff news, President Trump late Thursday raised tariffs on some Canadian goods to 35%, and announced a 10% global minimum and 15% or higher tariffs for countries with trade surpluses with the US, effective after midnight on August 7.

Federal funds futures prices are discounting the chances for a -25 bp rate cut at 86% at the  September 16-17 FOMC meeting and 65% at the following meeting on October 28-29.

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