Dollar Slides From 13-Month High as Cooling Payrolls Shift Rate Outlook; Euro Heads for Weekly Gain

The US dollar retreated from its strongest level in 13 months on Friday, as a softer-than-expected payrolls report tempered expectations for aggressive Federal Reserve rate hikes. The euro, meanwhile, extended its recovery, heading for a weekly gain against the greenback for the first time in three weeks.

Payrolls Data Triggers Dollar Selloff

The Bureau of Labor Statistics reported that the US economy added 175,000 nonfarm payrolls in April, below the consensus estimate of 240,000 and marking a significant slowdown from the revised 315,000 gain in March. The unemployment rate ticked up to 3.9%, while average hourly earnings rose 0.2% month-over-month, also missing expectations.

The data, released at 8:30 AM ET, immediately pressured the dollar index (DXY), which slid from its intraday high of 106.50 to trade near 105.80 in afternoon trading. The index had climbed to a 13-month peak earlier in the week on the back of resilient economic data and hawkish Fed commentary.

Euro Gains Ground Amid Broader Dollar Weakness

The euro rose 0.6% against the dollar on Friday, pushing EUR/USD above the 1.0750 level for the first time since late April. The single currency is on track for a weekly advance of approximately 0.8%, snapping a two-week losing streak.

Analysts attributed the euro’s strength primarily to the dollar’s decline rather than fresh eurozone catalysts. The European Central Bank has maintained a cautious tone, with policymakers signaling a potential rate cut in June if inflation data continues to soften. However, the divergence in labor market performance between the US and the eurozone has become a key driver of currency flows.

Market Implications and Fed Outlook

The payrolls miss has reshuffled expectations for the Federal Reserve’s next policy move. According to the CME FedWatch Tool, the probability of a rate cut at the September meeting rose to 48% from 38% a day earlier. Markets now price in roughly 45 basis points of total easing by year-end, up from 35 basis points before the data.

Fed Chair Jerome Powell, speaking after the central bank’s May 1 decision, had characterized the labor market as “still relatively tight” but noted that wage growth was gradually moderating. Friday’s report supports the narrative that the labor market is cooling without a sharp deterioration—a scenario that could allow the Fed to begin easing later this year without triggering recession fears.

For currency traders, the key question is whether the dollar’s pullback marks the beginning of a sustained downtrend or merely a temporary correction in a still-strong greenback. The dollar has rallied more than 4% since January, supported by robust US growth and sticky inflation that pushed back expectations for early rate cuts.

What This Means for Investors

The softer payrolls report provides some relief for importers and multinational corporations that have been squeezed by a strong dollar. A weaker dollar also tends to support emerging market currencies and commodities priced in dollars, including gold and oil.

However, currency strategists caution against reading too much into a single data point. Next week’s consumer price index (CPI) release for April will be critical in determining whether the dollar’s correction has further to run. A cooler inflation print would reinforce the case for Fed easing and likely push the dollar lower, while a hot number could reverse Friday’s moves.

Conclusion

The dollar’s retreat from its 13-month high reflects a recalibration of rate expectations following softer payrolls data. The euro has capitalized on the greenback’s weakness, but the sustainability of the move hinges on upcoming inflation data and central bank guidance. For now, markets are adjusting to a slightly less hawkish Fed outlook, providing a breather for currency markets that had been dominated by dollar strength.

FAQs

Q1: Why did the dollar fall after the payrolls report?
The payrolls report showed fewer jobs added than expected, with slower wage growth. This reduces the pressure on the Federal Reserve to keep interest rates high, making the dollar less attractive to yield-seeking investors.

Q2: Is the euro’s gain sustainable?
The euro’s gain is largely driven by dollar weakness rather than eurozone strength. Its sustainability depends on upcoming US inflation data and whether the European Central Bank signals a rate cut in June, which could limit further euro upside.

Q3: What should investors watch next?
The April US CPI report, due next week, is the most important data point. A lower inflation reading could accelerate the dollar’s decline, while a higher reading might reverse it. Fed speeches and minutes from the May meeting will also provide clues on the rate path.