Dollar Bulls Retreat as Slowing Pay Dents Fed Hike Speculation

For the first time in more than a month, dollar bulls are on their back foot.

The greenback snapped a five-week rally, its longest this year, after a report showed U.S. worker pay rose at the slowest pace on record, damping speculation that the Federal Reserve will boost interest rates next month from near zero.

A gauge of the greenback touched a two-week low Friday, capping a week of losses for the dollar against most of its major peers. Traders are looking ahead to manufacturing and employment data next week for indications of whether the economy is strong enough to justify the Fed’s first hike since 2006.

“The dollar is in full-fledged retreat,” said Stephen Casey, a New York-based senior foreign-exchange trader at Cambridge Global Payments, a currency and payments provider. Tepid wage growth “is going to put more pressure on the jobs report next week, because it really has to be strong to continue to move toward that September rate hike.”

The Bloomberg Dollar Spot Index dropped 0.1 percent this week to 1,208.4. The U.S. currency was little changed on the week at $1.0984 per euro in New York and 123.89 yen.

Wipeout Blow

The greenback wiped out its weekly gain Friday after labor data dashed projections that an improving job market would boost pay. The 0.2 percent rise in wages and salaries was the smallest since records began in 1982 and followed a 0.7 percent increase in the first quarter, Labor Department statistics showed.

The figures may limit the Fed’s ability to boost borrowing costs next month, Casey said.

The Federal Open Market Committee will tighten policy when it sees “some further improvement in the labor market,” and is “reasonably confident” inflation will move back to its 2 percent goal over the medium term, it said in a statement July 29. The central bank’s next scheduled announcement on interest rates is Sept. 17.

Traders are pricing in a 38 percent probability that the Fed will raise interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That compares with the 48 percent chance traders saw July 30.

Next Leg

The wage data were “negative for the dollar as much of the dollar rally has been built on a view that the Fed tightening would lead to another leg up,” Jonathan Lewis, a principal at New York-based Samson Capital Advisors LLC, said in a report Friday. The firm oversees $7.4 billion.

This week’s decline pared the Dollar Spot Index’s July advance to 2.3 percent. It gained this month on a growing conviction that the Fed is moving toward eventual tightening, while in the euro zone and Japan central banks are carrying out unprecedented stimulus.

Hedge funds and other managers boosted net bullish bets on the dollar to a four-month high of 385,544 contracts in the week to July 28, Commodity Futures Trading Commission data show.

The dollar was the best performer among 10 developed-nation peers in the past month, according to Bloomberg Correlation-Weighted Currency Indices. Its direction may hinge on U.S. economic indicators next week, including data on manufacturing Aug. 3, factory orders Aug. 4 and employment Aug. 7.

U.S. payrolls probably rose by 225,000 in July, after an increase of 223,000 in June, according to the median estimate of analysts surveyed by Bloomberg News.

The quarterly wage data “could give the Fed a massive headache between now and year-end,” Craig Erlam, a senior market analyst in London at Oanda Corp., a retail currency broker, said in a note. “While this in no way takes a September rate hike off the table, it could well prove quite damaging to the case for it.”

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