Dollar's Position Amid Weakening U.S. Labor Market and Impending Fed Rate Cuts

The U.S. dollar’s trajectory in the second half of 2025 has been increasingly shaped by a cooling labor market and mounting expectations of Federal Reserve rate cuts. With July 2025 nonfarm payrolls (NFP) adding just 73,000 jobs—far below the 110,000 forecast—market participants are recalibrating their assumptions about the Fed’s policy path. This slowdown, coupled with downward revisions to May and June data (a combined 258,000 jobs shaved off), underscores a labor market that is losing steam [1]. For forex traders, the implications are clear: the USD/JPY and USD/CHF pairs are poised for heightened volatility as the market anticipates a shift in U.S. monetary policy.

Labor Market Weakness and Dollar Dynamics

The July NFP report revealed a labor force participation rate decline and tepid hiring in key sectors like healthcare and social assistance, while federal government job losses continued [1]. These trends have eroded confidence in the dollar’s resilience. According to a report by Bloomberg, USD/JPY briefly spiked above 150.00 following the July data but quickly retreated, reflecting the yen’s sensitivity to divergent monetary policies [1]. Meanwhile, USD/CHF found temporary support near 0.8042, buoyed by Switzerland’s inflation data, which highlighted the Swiss franc’s role as a safe-haven asset amid U.S. uncertainty [1].

The August NFP report, expected to show 75,000 jobs added and an unemployment rate of 4.3%, will be a critical barometer. Analysts at the San Francisco Fed note that even a marginal improvement in hiring may not offset broader concerns about trade policy uncertainty and slowing private-sector growth [4]. This has pushed the market’s focus toward a potential Fed rate cut by December 2025, with bond markets already pricing in a 70% probability of a 25-basis-point reduction [4].

Strategic Positioning for USD/JPY and USD/CHF

For USD/JPY, technical indicators suggest a defensive stance. The pair is currently trading near 148.65, having rebounded from an August low of 146.22 [2]. Traders are closely watching whether this level holds, as a breakdown could test the 145.00 psychological barrier. Conversely, a sustained move above 150.00 might signal a short-term reversal, though the Bank of Japan’s cautious stance—coupled with elevated Japanese government bond yields—limits the yen’s upside [3].

USD/CHF, meanwhile, is trapped in a narrowing range between 0.7990 and 0.8100 [4]. The Swiss National Bank’s (SNB) pause in its rate-cut cycle, amid stabilizing manufacturing and services sectors, has limited the franc’s volatility. However, a weaker-than-expected August NFP could push the pair toward 0.8100, where a breakout would signal a bearish bias for the dollar. Conversely, a stronger report might reinforce the SNB’s dovish posture, capping the franc’s gains [4].

Policy Divergence and Positioning Strategies

The Fed’s anticipated rate cut contrasts sharply with the Bank of Japan’s and SNB’s cautious approaches, creating a fertile ground for carry-trade unwinding and yen-long positions. For investors, this divergence suggests a strategic tilt toward yen and franc cross-currency pairs. However, the path is not without risks. As Reuters highlights, private-sector payrolls have slowed, and initial jobless claims rose in late August, signaling further fragility in the labor market [5].

Traders should also monitor the interplay between NFP data and bond yields. A weaker report could drive U.S. Treasury yields lower, exacerbating the dollar’s decline and pushing USD/JPY toward 145.00. Conversely, a surprise strength in August payrolls might delay rate-cut expectations, offering a short-term reprieve for the dollar.

Conclusion

The U.S. labor market’s deceleration and the Fed’s pivot toward easing have created a pivotal juncture for USD/JPY and USD/CHF. With the August NFP report looming, strategic positioning must balance technical levels with macroeconomic signals. For USD/JPY, the focus remains on the 148.65–150.00 range, while USD/CHF’s breakout potential hinges on the SNB’s policy trajectory. Investors are advised to brace for volatility and consider hedging strategies as the Fed’s rate-cut timeline crystallizes.

Source:
[1] Employment Situation Summary - 2025 M07 Results [https://www.bls.gov/news.release/empsit.nr0.htm]
[2] USD/JPY Defends Rebound from August Low [https://www.forex.com/en/news-and-analysis/us-dollar-forecast-usd-jpy-defends-rebound-from-august-low/]
[3] USD/JPY Steadies Above 148.00 [https://www.fxstreet.com/news/usd-jpy-steadies-above-14800-with-nfp-in-the-spotlight-202509041747]
[4] SF FedViews: September 4, 2025 [https://www.frbsf.org/research-and-insights/publications/fedviews/2025/09/sf-fedviews-september-4-2025/]
[5] US Jobless Claims Rise [https://www.reuters.com/business/us-jobless-claims-rise-private-payrolls-growth-slows-2025-09-04/]