Dollar slides after soft jobs report, yen surges

By Karen Brettell and Harry Robertson

NEW YORK/LONDON, July 2 (Reuters) - The dollar fell sharply on Thursday after the closely watched June employment report showed U.S. employers added far fewer jobs than expected, while the Japanese yen surged as traders braced for possible intervention by Japanese authorities.

Employers added 57,000 jobs, below economists' expectations for 110,000 job gains. Unemployment dropped to 4.2%, from 4.3%.

Markets quickly repriced their expectations for Federal Reserve policy. Fed funds futures traders now see a 54% chance of a rate hike by September, down from 67% before the report.

"It is weaker than expected, but the bulk of the numbers were in leisure and hospitality. That's probably driven more by seasonal factors than by anything else, so it's not very nefarious," Sarah Ying, head of FX strategy at CIBC Capital Markets, said.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was last down 0.56% at 100.83. It earlier reached 100.55, the lowest since June 18, and was headed for its biggest one-day drop since April 30.

The euro gained 0.52% to $1.1435, and reached $1.1472, the highest since June 22.

The dollar had been buoyed in recent months by rising expectations that the Fed would raise rates as it continues to battle inflation running well above its 2% annual target. Strong capital inflows tied to the artificial intelligence boom have also supported the currency.

Fed Chairman Kevin Warsh said on Wednesday he will stick firmly to the central bank's 2% inflation target, but noted that inflation expectations and inflation risks have come down in recent weeks.

"Unless we continue to see disappointments in the labor market data, it still feels like the AI narrative is driving a lot of the flow," Ying said.

YEN SURGES 

The Japanese yen rallied sharply against the dollar on Thursday as traders weighed a shift in intervention strategy by Japan's Ministry of Finance and speculated whether Tokyo had already moved.

Sources told Reuters Japanese officials were abandoning their habit of telegraphing intervention risks, instead signaling a more targeted campaign to squeeze speculators and raise the cost of betting against the yen.

Officials were also avoiding any suggestion of a specific "line in the sand" exchange-rate level that would trigger action, in a more aggressive approach aimed at keeping traders guessing.

"If they're not going to give guidance, the MOF (Ministry of Finance) can come in at any time. So that is a scarier thought, I would think, relative to the current status quo," Ying said. 

"It's just a more aggressive way for the MOF to communicate and to respond to yen weakness."

The Japanese yen gained 0.95% against the greenback to 161.04 per dollar and reached 160.62, the strongest since June 18. It is on track for its biggest one-day gain against the dollar since April 30.

What triggered the move remained unclear, and Japan's Ministry of Finance declined to comment. Traders and strategists offered differing explanations, with some speculating that authorities had checked rates in the market — a move that typically signals a willingness to intervene and can rattle currency markets on its own.

"We will have to wait for data to ascertain if this was intervention, but the timing of the move does suggest that it was," Abbas Keshvani, Asia macro strategist at RBC Capital Markets in Singapore, said. 

In cryptocurrencies, bitcoin gained 2.80% to $61,762.

(Reporting by Karen Brettell; Additional reporting by Harry Robertson, Satoshi Sugiyama and Rae Wee; Editing by Louise Heavens, Will Dunham and Andrew Heavens)