FX.co ★ US dollar: strong labor market nudges Fed to make decision

The US Department of Labor reported the creation of 162,000 new jobs in August, a result three times higher than forecast and the strongest reading in five months, fully offsetting July's 23,000-job decline.

Such sizable figures forced the market to revise the odds of a Fed rate hike in September from 49.4% to 58.4% already on Friday. Earlier in the week, the probability had been assessed at only 35–36%.

The US services sector accelerated more than expected in August. The ISM services activity index rose to 55.4 from 54.1 in July, reaching a six-month high. Economists had expected only a slight increase to 54.3. The manufacturing sector, by contrast, showed a modest slowdown: the ISM manufacturing index fell to 54.6 from 55.6 in July, though it remains firmly in expansion territory.

The US economy is showing remarkable resilience. In its April report, the IMF forecast US GDP growth of 2.4% in 2026 and an unemployment rate near 4%. Current data supports those forecasts and even exceeds them in some sectors.

On Thursday, Fed governor Christopher Waller said he leans toward keeping the rate unchanged provided inflation continues to slow. The jobs report, however, tipped the scales in favor of the hawks. By the end of the week, federal-funds futures reflected a 58.4% probability of a 25-basis-point hike at the September 15–16 meeting.

The war in the Persian Gulf continues to put pressure on global energy markets. The longer the conflict persists, the greater the uncertainty and the stronger the demand for the dollar as a safe haven. As a major oil exporter, the US is better shielded from an energy shock than Europe or Japan, giving the dollar an additional edge. If the war ends, demand for safe-haven assets could unwind fairly quickly, including outflows from the dollar. It's also worth noting that high uncertainty undermines the petrodollar's position: some oil transactions are already being settled in other currencies, estimated at roughly 15–20% by various measures.

Friday's CFTC report showed speculators continue to trim their aggregate long dollar position, which fell to $26.7 billion — the fifth consecutive week of reductions. The decline from July's peak of $39.8 billion is already substantial. A strong labor market has supported the dollar, but an additional driver is needed to return it to a sustained bullish trajectory.

The market is awaiting the US inflation report for August on September 11. If inflation comes in higher than July's reading, that will increase the chances of a Fed rate hike in September and will support the dollar. If inflation continues to ebb away, the Fed will most likely leave interest rates unchanged, and the dollar will keep its slide.

At present, there is little basis for a broad-based strengthening of the dollar across the currency market.