Dollar falls as jobless claims rise to 225,000, missing forecasts

The dollar weakened Thursday after initial jobless claims rose to 225,000 last week, the highest in four months and above the 215,000 consensus, as the labor market showed fresh signs of softening.

"The claims number is a clear miss, but continuing claims edging lower to 1.78 million suggests layoffs remain contained," said James Okafor, macro analyst at Edgen. "This is a softening, not a breaking, labor market."

The Labor Department report showed claims rose from 212,000 the prior week, while continuing claims — a proxy for how easily unemployed workers find new jobs — fell to 1.78 million from a revised 1.79 million. The data follows ADP's report Wednesday showing private employers added 122,000 jobs in May, beating the 110,000 estimate, though the Challenger report revealed 97,006 announced job cuts for the month, the highest May total since 2020. AI-related restructuring accounted for 38,579 of those cuts, or roughly 40 percent of the total.

The mixed data leave the Fed in a holding pattern ahead of Friday's nonfarm payrolls report, where economists surveyed by Reuters expect 85,000 jobs added and the unemployment rate steady at 4.3 percent. A weak print could reinforce bets on rate cuts, while a strong number would push those expectations further out.

The dollar index fell against a basket of major currencies, with EUR/USD rising as the euro capitalized on dollar weakness. GBP/USD also gained, while USD/JPY retreated from recent highs near the 160 yen level that has drawn Bank of Japan attention. USD/CAD moved lower alongside falling oil prices, which reduced demand for the greenback as a safe-haven asset.

The Beige Book, published Wednesday, described the labor market as a "low-hire, low-fire environment," with employers hiring selectively for critical positions. That characterization aligns with the JOLTS data released earlier this week, which showed layoffs declining in April even as hiring slowed.

Labor Market in Focus Ahead of Payrolls

Friday's employment report will provide the clearest signal yet on the trajectory of the labor market. If payrolls come in below the 85,000 consensus, it would mark the third straight month of sub-100,000 gains, a trend that historically has preceded broader economic softening. The three-month average of payroll additions currently stands at roughly 107,000, above the roughly 80,000 breakeven rate estimated by the Atlanta Fed but trending lower.

Dollar Outlook Hinges on Data Path

The dollar's near-term direction depends on whether the labor market continues to cool at a gradual pace or deteriorates more quickly. Markets are pricing in a higher probability of Fed rate cuts by year-end, and a weak payrolls number Friday could accelerate those expectations. Conversely, a rebound in hiring would push rate-cut bets further out, supporting the dollar.

This article is for informational purposes only and does not constitute investment advice.