Dollar weakens as traders eye Fed policy shift

The U.S. dollar fell on Monday as investors reassessed the Federal Reserve’s policy outlook following softer-than-expected labor market data, raising bets on near-term interest rate cuts.

Nonfarm payrolls rose by 142,000 in August, below the 165,000 forecast, while the unemployment rate unexpectedly ticked up to 4.2% from 4.1%. Average hourly earnings growth also decelerated to 0.2% month-on-month, reinforcing concerns over a cooling economy. The dollar index, which tracks the greenback against a basket of major peers, slipped 0.3% to 101.10 by mid-morning in New York.

Traders increased wagers on a Fed rate cut at the September policy meeting, with futures pricing in a roughly 65% probability of a 25-basis-point reduction, up from 50% late last week. The shift follows recent comments from Fed officials signaling a more cautious stance amid mixed economic signals. "The labor market is weakening faster than anticipated, and the Fed may need to act sooner rather than later," said a strategist at a major bank.

Attention now turns to this week’s U.S. inflation data, with the consumer price index (CPI) due on Wednesday. Economists expect headline CPI to rise 0.2% month-on-month in August, while core CPI—excluding food and energy—is forecast to increase 0.2% as well. Any deviation from these estimates could further sway Fed policy expectations and dollar movements.

The euro and yen gained ground against the dollar, with EUR/USD up 0.4% at 1.1050 and USD/JPY down 0.5% to 144.80. The British pound also strengthened, rising 0.3% to 1.2850 as traders priced in potential Bank of England dovishness.

Markets remain sensitive to incoming data, with traders closely monitoring additional labor reports and Fed speakers for further clues on the policy path ahead.