United States Dollar Index weakens below 99.50 as yields ease
- US Dollar Index softens to around 99.40 in Thursday’s early European session.
- Private US companies added jobs at a slower-than-expected pace in August.
- Traders will closely monitor the US August employment data on Friday.
The US Dollar Index (DXY), an index of the value of the US Dollar (USD) measured against a basket of six world currencies, currently trades near 99.40 in the early European trading hours on Thursday. The DXY faces some selling pressure while US Treasury yields slipped from multi-year highs. The US August ISM Services Purchasing Managers Index (PMI) report will be published on Thursday.
Private companies added 38,000 jobs in August, down from 46,000 in July, according to the US Automatic Data Processing Inc. (ADP) on Wednesday. This figure came in below the market consensus of 47,000 and registered the smallest gain since January. Weaker-than-expected ADP Employment weighs on the US Dollar against its rivals.
However, hawkish comments from the Federal Reserve (Fed) Chair Kevin Warsh could underpin the DXY in the near term. At the Jackson Hole meeting last week, Warsh reiterated the Fed’s commitment to its inflation target and indicated policymakers were not yet confident price pressures were easing sufficiently.
On Tuesday, New York Fed President John Williams said that rising long-term bond yields are not driven by inflation fears but are instead a reflection of a solid economy.
Markets are currently pricing in a 62% probability of a US rate hike this month, the CME FedWatch Tool showed.
Traders brace for the US jobs data on Friday, which could help shape expectations for the Federal Reserve's (Fed) next policy move. The Nonfarm Payrolls (NFP) are expected to show a 58,000 jobs addition in August, while the Unemployment Rate is projected to hold steady at 4.1% during the same period.
Dollar reaction seen limited even on hawkish NFP surprise
According to TD Securities, a stronger-than-expected US jobs report would likely give the Dollar an initial boost, but the bank cautions that the impact on policy expectations should be contained. Its FX strategists argue that a "hawkish NFP surprise is knee-jerk bullish USD but insufficient for rate hike," underscoring their view that even a robust payrolls print on its own would not be enough to justify a September move by the Fed.
Williams flags strong economy behind higher yields, keeps Fed focus on 2% inflation
Fed's Williams delivers a slightly above-baseline tone, with a 6/10 FXS Speechtracker score versus a 5.9/10 historical average, emphasizing that rising yields reflect a strong economy and robust outlook rather than worsening inflation expectations. The remarks that tariffs and Middle East conflict are pushing inflation above target, yet inflation expectations remain contained and the trend is toward lower inflation, frame a nuanced stance: financial conditions are tightening via markets, but the Fed remains data-dependent with price stability at 2% as job number one. Overall, the combination of solid labor market, strong investment demand, and contained expectations suggests a cautiously hawkish bias anchored in confidence about the disinflation path.
The FXS Fed Sentiment Index slipped by 1.42 points to 127.44, signaling a modest pullback in perceived hawkishness despite remaining firmly above the neutral 100 line. This indicates that, while the speech stays in hawkish territory, markets interpreted the emphasis on contained inflation expectations and a visible trend toward lower inflation as tempering the overall hawkish signal from the FXS Speechtracker.
Technical Analysis: US Dollar
In the daily chart, Dollar Index Spot holds below the 100-day Simple Moving Average (SMA) and the Bollinger Bands’ 20-day middle line, which keeps the near-term tone capped despite the recent recovery from sub-99 levels. The Bollinger upper band marks the top of the current volatility envelope, while the Relative Strength Index (14) around 45 suggests consolidative momentum rather than a decisive trend, leaving the index vulnerable as long as it remains under these layered resistances.
On the topside, initial resistance aligns near the Bollinger middle band at 99.42, ahead of the 100-day SMA at 99.75, with the Bollinger upper band around 100.15 acting as a more distant barrier. On the downside, the next meaningful support emerges at the Bollinger lower band near 98.65, where a break would open the door to a deeper pullback within the broader range.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.