Euro slides as US jobless claims drop to 208,000, boosting dollar

The US labor market remains resilient, with weekly jobless claims falling to the lowest level in 10 weeks and reinforcing the case for the Federal Reserve to keep rates elevated.

The number of Americans filing new applications for unemployment benefits dropped by 8,000 to a seasonally adjusted 208,000 in the week ended July 11, the Labor Department reported Thursday. That came in well below the 217,000 consensus estimate from economists polled by Reuters and the 219,000 forecast by FactSet, pointing to continued stability in the labor market.

"The claims data shows employers are still reluctant to cut head count despite the broader economic slowdown," said James Knightley, chief international economist at ING. "This gives the Fed cover to maintain its cautious stance on rate cuts."

The four-week moving average, which smooths out weekly volatility, declined by 4,750 to 214,250. Continuing claims, a proxy for hiring, fell by 16,000 to 1.805 million in the week ended July 4. The data follows the Fed's Beige Book report Wednesday, which said "employment rose on balance" in early July, with five of 12 districts reporting modest to solid gains.

The stronger-than-expected labor market data pushed the dollar higher against major peers, with the euro falling 0.3 percent to $1.0875 as traders trimmed bets on aggressive Fed easing. The dollar index rose 0.2 percent, extending its recovery from last week's lows. Currency markets have been on edge as traders weigh the resilience of the US economy against slowing growth signals from Europe and China.

Thursday's claims report adds to a mixed picture of the US jobs market. The government's June employment report showed employers added just 57,000 jobs, less than half the prior month's total, while the unemployment rate edged down to 4.2 percent from 4.3 percent — a decline driven partly by workers leaving the labor force. Weekly claims have stabilized in a range between 200,000 and 250,000 since the economy emerged from the pandemic recession, a level economists describe as consistent with a "slow hire, slow fire" labor market.

The data matters for the Federal Reserve's policy path because a tight labor market keeps upward pressure on wages and services inflation. Fed Chair Jerome Powell has repeatedly said the central bank needs to see "greater confidence" that inflation is moving sustainably toward its 2 percent target before cutting rates. Markets currently price a 58 percent probability of a quarter-point rate cut at the Fed's September meeting, down from 68 percent a week ago, according to CME FedWatch data.

For the euro, the divergence between a resilient US economy and a struggling euro zone is the dominant driver. The European Central Bank cut its deposit rate by 25 basis points to 3.75 percent in June, its first reduction since 2019, and markets expect another cut in September as growth stagnates. German industrial production fell 2.5 percent in May, the biggest drop this year, while the euro zone composite PMI has lingered below the 50 expansion threshold for much of the second quarter.

The next major test for the dollar and the euro comes with next week's US retail sales data and the Fed's July 30-31 policy meeting, where officials are widely expected to hold rates steady at 5.25 percent to 5.5 percent.

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