US Dollar falls as weak US jobs data dims Fed rate hike expectations

The dollar fell against major currencies including the yen and euro on Friday after U.S. employment unexpectedly declined in July, fueling concerns about the economy's strength and undermining the case for the Federal Reserve to raise interest rates.

The U.S. economy lost 23,000 jobs in July, the Labor Department said, compared with economists' expectations for an increase of 80,000 jobs, according to a Reuters poll. The U.S. unemployment rate fell to 4.1% as the labor participation rate fell to a near a five-and-a-half year low of 61.4%.

The dollar JPY weakened against the yen after the report, shedding gains made in recent days in the aftermath of a historic intervention last week between Japanese and U.S. authorities, which had pushed it to a 13-week low.

It was last down 0.57% to 157.56 yen but on track for a weekly gain of about 0.10%.

The euro EUR= was last up 0.39% against the dollar at $1.1568. It is on track for a weekly gain of 0.41% against the dollar.

The dollar's decline reflected the market's waning expectations for a Fed hike. Markets now put a 56% chance that the Fed will holding rates steady in September, up from 45% a day earlier, according to the CME's FedWatch tool.

"I think no one really expected non-farm payrolls to be negative or that there would be a big downward revision in the June numbers," said Thierry Wizman, global FX and rates strategist at Macquarie Group.

"I'm inclined to think that the market has shifted the Fed hike into October or December instead of September, Wizman said, adding that "anytime you see a print that suggests the U.S. economy is weak or that the labor market is not as strong as otherwise thought, they effectively push out the prospect of a Fed rate hike."

U.S. Treasury yields fell sharply following the report. The 2-year note US2YT=RR yield, which typically moves in step with Fed rate expectations, fell 4.2 basis points to 4.245%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 2 basis points to 4.649%.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.44% to 99.50. It is set to a weekly loss of 0.31%, making the second consecutive week of declines.

Gold rose as the U.S. dollar fell. Spot gold XAU= rose 2.55% to $4,347.29 an ounce.

-Reporting by Chibuike Oguh; Editing by Nick Zieminski and Alexander Smith/Reuters