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Dollar gives up gains after weak US jobs reports

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8 September 2025

Written by
Enrique Díaz-Álvarez

Chief Economist

A tentative dollar rally came to a sudden end Friday after the release of the weak August labor market report, which suggested the great US jobs machines grinding to a halt.

M
arkest quickly priced in cuts in the three remaining Federal Reserve meetings left in 2025, bonds rallied and stocks sold off. While the weakness in the US labor market is undeniable, we note that market responses remained muted outside the bond market, and the dollar and the stock market ended the week not far from where they started it. All in all, the dollar remains resilient so far to its main two head winds: institutional degradation in the US and a clear slowdown in the US economy.

The weak labor market report sealed the outcome of the next September meeting. Nevertheless, we will be paying close attention to the US inflation report for August on Thursday. The European week will be dominated by the September ECB meeting, but we expect the central bank to try to make this as much of a non-event as possible.A wild card for markets will be the possibility of further developments in the legal process by which Trump is trying to fire Fed governor Lisa Cook.

USD

The US labor report for August put to rest the debate as to whether the labor market is stalling. Only 22k jobs were created in the month, essentially a rounding error. Further, the revisions to past months numbers were negative again´, and in fact June was the first month that saw a net jobs loss since the COVID pandemic. Unemployment ticked up, and wage gains were anemic. The negative impact of Trump’s tariffs on the economy is now undeniable, as manufacturing employment has now shrunk for the fourth month in a row and business surveys invariably mention tariff related disruption as a major headwind. With a Fed cut in rates guaranteed later in the month, all eyes are now on September CPI inflation, which is expected to show yet another month of above target inflation and confirm the US is in the midst of full’on stagflation.

GBP

The relentless rise in long term Gilt yields took a breather last week, aided by the attractive levels at which UK sovereign bonds can now be bought and alo by the weak US labor market report, which reignited fears of a global slowdown and subsequent central bank cuts. Nevertheless, Sterling continues to lose ground against the currency of the UK’s main trade partner, the Eurozone, on fears about stagflation and lack of fiscal credibility from the wobbly Labor government. This week the focus will be on a rich spate of macroeconomic data, albeit from the month of July and therefore somewhat lagged.

EUR

The September ECB meeting may be this week, but it is being completely overshadowed by the drama around the French budget. As in the UK, the inability of the government to carry out even modest spending cuts is causing turbulence in the bond market. However, the denouement may be more dramatic in the French case, as the government has threatened to resign in the event cuts are rejected by Parliament, as seems likely. With inflation back on target and little economic news this week, we expect that the French situation will be the focus of Lagarde’s post meeting conference.

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