US dollar recovers as US jobs reignite Fed hike bets

USD: US jobs surprise revives Fed hike bets

US payrolls rose by 162,000 in August, easily beating the 55,000 consensus and topping every estimate. Private employers added 127,000 jobs, while manufacturing payrolls increased by 16,000. The unemployment rate held at 4.1%, even as labour force participation edged up to 61.6%. Underemployment also fell to 7.7%, while average weekly hours rose to 34.4.

Upward revisions made the report even stronger. June and July payrolls were raised by a combined 55,000, turning July’s initial 23,000 decline into a 21,000 gain. Wage growth held at 0.3% month over month and eased only slightly to 3.1% annually. Together, the figures show that labour demand remains firm after several softer employment indicators earlier in the week.

The sector breakdown was more concentrated. Restaurants and local government education accounted for 101,000 of the new jobs, while information employment fell by 23,000. Even so, the headline strength, positive revisions and longer workweek challenged expectations of a broader hiring slowdown. Traders responded by lifting the implied probability of a September Federal Reserve rate hike above 60%, pushing Treasury yields higher.

The US dollar recovered after the release, with DXY rebounding from a weekly low near 98.92 to trade around 99.3. The index remains below the 100 level, despite stronger US rate support and continued safe-haven demand. Next week’s US CPI report will determine whether the Fed has enough evidence to raise rates on September 16. A firm inflation print could drive DXY through 100, while softer data would weaken the hike case and bring the 98.80 support area back into focus.

CAD: Canada’s jobs slump reverses Loonie rally

Canada’s labour market lost 41,700 jobs in August, far below expectations for a 15,000 increase and reversing much of July’s 75,100 gain. Full-time employment fell by 35,900, while the public sector shed 20,000 positions for its third straight monthly decline. Employment also weakened among younger and core-age workers, with Quebec and Ontario leading the provincial losses. The unemployment rate held at 6.4%, but only as participation slipped to 65.0%.

The wage data added to the weakness. Annual growth in average hourly earnings slowed to 2.0% from 3.0% in July, while the employment rate fell to 60.8%. Lower wage growth should ease domestic inflation pressure, but the slowdown also points to weaker household income and spending. Manufacturing provided one bright spot with 22,000 new jobs, yet that gain was not broad enough to change the overall picture.

The report triggered a sharp reversal in the Canadian dollar, with USD/CAD jumping from 1.3785 to nearly 1.3870 on Friday morning. That move erased most of the loonie’s rally after the Bank of Canada held rates at 2.25% and warned that inflation risks were rising. A strong US payrolls report widened the contrast, as the United States added 162,000 jobs and prior estimates were revised higher by 55,000. The resulting shift in relative rate expectations pushed the US-Canada two-year yield spread back toward 130 basis points.

USD/CAD now sits near the middle of this week’s wide 1.3783 to 1.3940 range. Weak Canadian employment challenges expectations for an early Bank of Canada rate hike, even as higher energy costs keep the inflation debate open. Next week’s US CPI report and Canada’s planned counter-tariffs could determine whether the pair tests 1.3940 or returns toward 1.3780. A hotter US inflation print or renewed trade escalation would favour further upside, while softer inflation could revive demand for the Canadian dollar.

MXN: Peso pushes through key support

The Mexican peso heads into Friday as the best performer among 14 major currencies, gaining 0.69% and pushing USD/MXN to a fresh cycle low near 16.89. The pair is down about 0.79% this week as softer US yields and dovish comments from Fed Governor Christopher Waller strengthened demand for emerging-market carry. Mexico’s yield advantage remains central, with the two-year spread over the US near 343 basis points. Banxico’s decision to hold rates at 6.50%, alongside its concern over upside inflation risks, should preserve that support for now.

Mexico’s domestic backdrop has also improved. The economy expanded 1.4% in the second quarter, prompting Banxico to raise its 2026 growth forecast to 1.5%, while headline inflation sits close to the 3% target. Higher oil prices offer some fiscal support, and reserves remain strong at roughly $259 billion. Yet positioning is crowded, with leveraged funds holding their largest net peso exposure since December, which could amplify any reversal.

USD/MXN has now broken below the previous 52-week low near 16.92, leaving 16.75 to 16.80 as the next support area and 17.00 as initial resistance. Next week, US inflation takes centre stage after Waller said the data would heavily influence his September vote. A softer CPI print would reinforce the carry trade, while an upside surprise could revive Fed hike expectations and test crowded peso longs.

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Calendar: August 31 – September 04

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.