Market Brief: Dollar Tumbles After US Job Creation Collapses

The dollar is plunging after the US labour market hit a wall last month, reinforcing market expectations for at least two rate cuts from the Federal Reserve in the back half of the year. According to data just released by the Bureau of Labor Statistics, just 73,000 jobs were added in July - representing an undershoot relative to the 105,000-consensus forecast - and the unemployment rate ticked up to 4.2 percent. The previous two months were revised lower by a combined 260,000 roles, and private sector job creation flipped into negative territory. Total payroll gains have averaged 35,000 over the last three months, marking the weakest pace since the depth of the pandemic in 2020.

Treasury yields are tumbling across the front of the curve as traders add to bets on a rate cut at the Fed’s September meeting. The release is helping offset a reaction that unfolded earlier in the week after Wednesday’s Federal Reserve press conference, in which Chair Powell said “inflation is further from our goal than employment,” and on the heels of yesterday’s acceleration in the core personal consumption expenditures index.

The dollar looked set to finish the week with its biggest weekly gain in almost three years after Donald Trump signed an executive order imposing “reciprocal” tariffs ranging from 10 to 41 percent on imports from a vast array of countries, triggering a tumble in currencies exposed to US demand. A 35-percent duty on non-USMCA*-compliant Canadian goods, announced in a separate order, was implemented last night.

Conditions could get worse. It is true that the US remains one of the least trade-sensitive economies in the world, with imported products making up a diminishingly-small share of household consumption. But we suspect that the macroeconomic effects of recent tariff changes won’t become clear until November or December at the earliest. Vast inventory stockpiles are still being drawn down, particularly among many of the largest retailers, dulling the immediate impact on consumer prices. Products are often stored at ports before coming “onshore” from a customs standpoint, meaning that it can take time before duties are applied. Based on the latest data (which is still subject to some inconsistencies), we’ve revised our estimate of the average tariff rate on products imported into the US in June to around 10.2 percent—up dramatically from January, but still far below the 15-to-18-percent level that could be reached in September and beyond. And because many supply chains operate at a three-to-six month lag—especially in product lines with intermediate production steps—it could be early 2026 before today’s cost increases are borne by consumers. It is extremely unlikely that the broader economy will emerge unscathed.

Although price action in the currency markets should slow over the next two weeks as the Northern Hemisphere enters the summer doldrums, there are a few key on- and off-calendar event risks to keep an eye on.

Investors overwhelmingly expect the Bank of England to deliver another quarter-point rate cut next Thursday as it reduces monetary restrictiveness at a “gradual and careful” pace, but still-sticky inflation could lead policymakers to guide markets away from expecting a quarterly cadence going forward. The Bank of Mexico should cut borrowing costs by a well-telegraphed quarter point later on the same day, slowing the pace of easing from the jumbo-sized moves that it had been making earlier this year. Canadian job numbers on Friday are expected to exhibit some mean reversion after June’s blockbuster print, but the series has become deeply unpredictable, and the loonie could move sharply on the release. And all hands will be on deck for the next US consumer price index update on the 12th, which could deliver more evidence of a reallocation process in the American economy as households pay more for imported goods and less for services.

Off-calendar, negotiations on Trump’s latest round of tax increases are still underway, and further adjustments are likely in the days ahead. Another round of headline-driven turbulence is likely if—as we expect—the US Court of Appeals for the Federal Circuit chooses to strike down the president’s use of the International Emergency Economic Powers Act to implement his tariffs, but this could elapse fairly quickly, given that the administration is likely to escalate the case to the Supreme Court next.

Please note: Distribution of the daily Market Briefing will pause between August 4 and August 15 as I prepare for an extremely busy speaking agenda this autumn. I will, of course, send breaking news updates if any major market-moving developments occur.

*United States-Canada-Mexico Trade Agreement. According to an estimate published in the Bank of Canada's latest Monetary Policy Report, 100 percent of Canada's energy exports are expected to comply, along with 95 percent of all other goods exports.

Economic Calendar