US Dollar Nears Two-Month Low as EUR/USD Hits Seven-Week High

Key Takeaways

• EUR/USD rose to around $1.1558, its strongest level since mid-June, as the US dollar hovered near a two-month low.
• Weaker US employment data pushed Treasury yields lower and reduced the probability of a September Federal Reserve rate hike to about 44% from 67% a week earlier.
• USD/JPY remained close to 158, keeping intervention risk and the economic cost of persistent yen weakness in focus.

US Dollar Weakens as Fed Rate Expectations Shift

The US dollar remained under pressure on Monday as softer labour-market data encouraged investors to reduce expectations for another near-term increase in US interest rates. The dollar index, which measures the currency against six major peers, traded near 99.6, close to its lowest level since June 2.

The latest US employment report showed that the economy unexpectedly lost jobs in July, while payroll growth for the previous two months was revised sharply lower. The figures challenged the view that the labour market remained strong enough to tolerate tighter monetary policy and prompted a reassessment of the Federal Reserve’s September decision.

Futures pricing placed the probability of a September rate hike at roughly 44%, down from about 67% one week earlier. That adjustment supported US government bonds and initially pulled the benchmark 10-year Treasury yield towards 4.64%. The yield later edged up to around 4.66% as markets prepared for $125 billion of new Treasury issuance, but it remained below the levels seen before the employment report.

Lower yields can weaken the dollar because they reduce the relative return available on dollar-denominated assets. The improvement in global risk appetite added to the pressure. Wall Street finished the previous session at record levels, while Asian equities advanced, reducing demand for the dollar as a defensive currency.

EUR/USD Reaches Its Strongest Level Since Mid-June

EUR/USD advanced to approximately $1.1558 before easing slightly, leaving the pair close to a seven-week high. The move was driven primarily by broad dollar weakness rather than a major shift in the eurozone outlook, although the euro also benefited from the decline in US rate expectations.

Interest-rate differentials remain central to the EUR/USD outlook. When investors expect US rates and Treasury yields to stay higher for longer, the dollar generally receives support. The latest employment data weakened that argument by suggesting that further tightening could place additional pressure on an already cooling labour market.

The euro’s move above the $1.15 area is therefore significant for near-term market sentiment. It indicates that the pair has retained the recovery established during the previous week, despite uncertainty surrounding energy prices and the wider economic effects of disruption in the Strait of Hormuz.

However, the currency pair has not yet received a decisive signal from inflation. A stronger-than-expected US consumer price reading could lift Treasury yields, revive expectations of a September Fed rate hike and return support to the dollar. A softer release would reinforce the view that US price pressure is gradually moderating and could allow EUR/USD to test higher levels.

USD/JPY Holds Near 158 as Intervention Risk Persists

The Japanese yen traded near 157.90 per dollar in early activity, while USD/JPY later moved towards 158.23. The yen has surrendered part of the sharp gain generated by the recent joint US-Japan currency intervention, but it remains stronger than the nearly 164-per-dollar level reached in late July.

That intervention lifted the yen by about 5% and demonstrated that authorities were prepared to respond when rapid depreciation threatened broader financial stability. As USD/JPY moves closer to 160 again, the possibility of further official action may limit the pair’s upside, even though the wide gap between US and Japanese interest rates continues to weigh on the yen.

Weakness in the Japanese currency is also becoming a more visible corporate and economic issue. A cheaper yen increases the value of overseas earnings for major exporters, but it raises the domestic cost of imported energy, food and raw materials. Those pressures can squeeze company margins, weaken household purchasing power and complicate Japan’s attempt to establish sustainable inflation supported by wages and demand.

Japanese executives have also warned that sharp exchange-rate swings make earnings forecasts and investment decisions more difficult. A March survey found that 120–124 yen per dollar was the most desirable range among the largest group of respondents, while only 11% preferred an exchange rate above 150.

The Bank of Japan remains another important variable. A summary of its July meeting showed that policymakers were increasingly alert to inflation risks and could consider raising rates faster than previously expected. Stronger expectations of a September BOJ increase could support the yen, while any sign of delay would leave USD/JPY sensitive to renewed upward pressure.

US CPI Becomes the Next Major Test for Currency Markets

Attention now turns to the July US Consumer Price Index, scheduled for Wednesday, August 12, at 8:30 a.m. Eastern Time. The consensus forecast points to a 0.1% monthly increase in headline CPI and a 0.2% rise in core CPI. Core inflation is expected to slow to 2.5% year on year from 2.6% in June. The release date is confirmed by the US Bureau of Labor Statistics.

The inflation report will test whether the dollar’s latest decline can continue. A core monthly reading close to 0.2% would be consistent with gradual disinflation and may leave the Federal Reserve on hold while officials assess the softer labour market. Repeated readings closer to 0.3%, however, could revive the case for tighter policy.

Energy prices add another layer of uncertainty. Brent crude traded near $84–$85 per barrel as uncertainty over shipping through the Strait of Hormuz persisted. If elevated fuel costs feed into broader inflation, the Fed may find it harder to respond to weaker employment conditions with a more accommodative stance.

Producer-price data on Thursday and US retail sales on Friday will provide further evidence on costs and consumer demand. Together, these releases could determine whether the current combination of lower yields, stronger risk appetite and a softer dollar extends into the second half of August.

Conclusion

The dollar’s decline reflects a clear change in rate expectations after weaker US labour data, allowing EUR/USD to reach its highest level in seven weeks. The next direction will depend heavily on whether July inflation confirms that price pressure is easing or reopens the possibility of a September Fed rate hike.

For USD/JPY, monetary-policy divergence remains supportive, but intervention risk and growing concern over the economic cost of a weak yen create a ceiling for renewed dollar gains. With US CPI, producer prices and retail sales all due this week, volatility across the major currency pairs may remain elevated.