Dollar Rally Falters as Investors Question Sustained Gains

The US dollar saw a temporary boost following a stronger-than-expected August jobs report. The Nonfarm Payrolls figure rose to 162k, far exceeding consensus estimates of 55k. Meanwhile, July's employment was revised upward to 21k from an initially reported decline.

The unemployment rate held steady at 4.1%, and labour force participation improved to 61.6%. However, average hourly earnings slowed slightly to 3.1% year-over-year from 3.2% yoy, indicating wage pressures are easing gradually.

Markets now price a significant chance of further Federal Reserve tightening by December, with around 60% probability of a 25bps Fed hike at the September FOMC meeting and approximately 35bps of cumulative tightening by year-end.

The dollar's gains have been modest, with DXY rising only 0.3% on Friday, yet remaining essentially unchanged since Fed Chair Warsh's Jackson Hole speech. This divergence suggests investors may not be convinced that higher yields can sustain a dollar rally.