In July, the U.S. non-farm payroll unexpectedly turned negative, dealing a heavy blow to the dollar. The market has lowered its expectations for a rate hike in September, and the Federal Reserve may continue to hold its position.

U.S. employment data for July surprisingly weakened, further diminishing market expectations for a recent interest rate hike by the Federal Reserve, causing the dollar to weaken on Friday. The data indicated that U.S. non-farm payrolls fell unexpectedly in July, and employment figures for the previous two months were significantly revised downwards, prompting investors to reassess the Federal Reserve's monetary policy outlook. As a result, the Bloomberg Dollar Spot Index fell by as much as 0.5% on Friday, reaching its lowest level since May. The dollar weakened against all major currencies, with the yen showing a notable appreciation against the dollar. Data released by the U.S. Bureau of Labor Statistics revealed that non-farm payrolls decreased by 23,000 in July, and employment figures for May and June were also revised down. Meanwhile, the unemployment rate dropped to 4.1%, but mainly due to a continued decline in the labor force participation rate. Additionally, wage growth has slowed, indicating a further cooling of the labor market. Sarah Ying, head of foreign exchange strategy at CIBC Capital Markets, stated that the employment data released that day "significantly undermined market confidence in a September rate hike by the Federal Reserve." She anticipates that U.S. economic data will continue to cool in the future, leading the Federal Reserve to ultimately maintain interest rates at their current level. Following the release of the employment data, the interest rate swap market showed that traders had significantly cooled on expectations for a September rate hike, with the probability of an increase dropping from nearly 60% before the employment report to about 40%. Nathan Thooft, a senior portfolio manager at Manulife Investment Management, noted that this employment report further corroborated the institution's long-held view that market expectations for a Federal Reserve rate hike had been overly optimistic. He stated that if the labor market continues to weaken, the Federal Reserve will have ample reasons to keep current interest rates unchanged. Since the end of June, as market expectations for a hawkish stance from the Federal Reserve have consistently weakened, the dollar has entered a downward trend overall. At the same time, bullish sentiment on the dollar has also noticeably cooled. Data shows that the cost of options used to hedge against the risk of a dollar rise has fallen to its lowest level since mid-May, reflecting a decline in investor confidence regarding further dollar strengthening. However, data from the U.S. Commodity Futures Trading Commission as of July 28 showed that speculative funds had still been increasing their long positions in the dollar, with bullish sentiment reaching its highest level since 2014. Following the release of the latest employment data, it remains to be seen whether there will be any positioning adjustments in the market. It is worth noting that since the appointment of Federal Reserve Chairman Walsh, his communication style has downplayed forward guidance, making every economic data point a significant variable affecting market expectations, which has intensified market volatility. Before the September monetary policy meeting, the Federal Reserve will also receive another non-farm payroll report and two inflation data releases, which will continue to sway the market's judgment on the Federal Reserve's next policy path.