The US dollar's strong advance is running into significant headwinds, as a shift in Federal Reserve rate expectations and softer economic data break the greenback's momentum. The US Dollar Index (DXY) – a key measure against a basket of major currencies – slid to around 100.50, testing a critical support zone and raising doubts about the sustainability of the recent bullish trend.
What’s driving the pullback? A below-consensus US labour-market signal has triggered a rapid repricing of rate-hike bets. Traders now see a lower probability of a September Fed increase, which had been one of the dollar's strongest tailwinds. Two-year Treasury yields, closely tied to policy expectations, pulled back after three straight sessions of gains, further easing upward pressure on the dollar.
Major currencies fight back. The euro climbed to a two-week high near $1.1442, sterling held around $1.3361 – on track for its best week since April – and the Australian dollar snapped a four-week losing streak near $0.6935. New Zealand’s kiwi was up more than 1% for the week at $0.5702. The yen also found relief, trading near 161.01 per dollar after rebounding nearly 1% in the previous session, though Tokyo remains on intervention watch.
Technical picture. The DXY's drop to 100.50 marks a test of both psychological and technical support. The daily Relative Strength Index (RSI) is retreating from overbought territory, suggesting waning buying momentum. Resistance now sits near 101.50, a former consolidation area. A confirmed break below 100.50 could open the door to the 100.00 barrier and the 99.50 support, while a bounce might target a move back toward 101.50.
Macro implications. The dollar's reprieve reflects a broader recalibration: markets are no longer treating further Fed tightening as a one-way bet. The greenback still holds a yield advantage, but the aggressive positioning that fueled its June surge has cooled. The next directional leg will likely be determined by incoming inflation and activity data, as well as how forcefully the Bank of Japan and other central banks respond to their currencies' prior weakness.
For the crypto and commodities space, a softer dollar could provide a tailwind, easing financial conditions and supporting risk assets that have often moved inversely to the greenback.
