The future of the dollar index – London Business News | Londonlovesbusiness.com

The U.S. Dollar Index (DXY) fell below the 101.00 level on Friday morning, before making a modest recovery and currently trading near 101.07 points.

This came after notable fluctuations in the foreign exchange markets overnight, driven by mixed U.S. economic data.

The ADP employment report came in significantly lower than expected, with just 99,000 jobs added compared to the 145,000 forecast, leading to a marked weakening of the U.S. dollar.

However, weekly jobless claims came in at 227,000, slightly better than the 230,000 expected, which helped the dollar recover briefly.

Despite this, the recovery was short-lived as the dollar retreated again after the Institute for Supply Management’s services data came largely in line with expectations.

On another note, Federal Reserve member Goolsbee made statements suggesting that the path towards rate cuts is not only near but also likely to involve multiple cuts over the next twelve months, according to the Fed’s latest projections.

Goolsbee also pointed to increasing warning signs of labour market slowdown, cautioning that this weakness could worsen. Nonetheless, he emphasized not placing too much weight on just one month of employment data when making decisions.

From my perspective, all eyes are now on the highly anticipated Non-Farm Payrolls (NFP) report today, which I believe will be the key driver of market movements for the coming week. The expectation is for the report to either significantly exceed forecasts or show a notably lower unemployment rate, which could bolster the U.S. dollar and dampen dovish expectations regarding interest rate policies. Conversely, any notably weak results could heighten concerns about a slowing labour market, potentially leading to significant market volatility and putting pressure on high-risk currencies.

In my opinion, data that aligns closely with expectations will represent a “neutral” outcome for the markets, supporting the Federal Reserve’s desired “soft landing” scenario. Under this scenario, U.S. equities could find room to make new gains, while the dollar might slip back to its lower levels.

Although this scenario might seem the least disruptive from my perspective, the overall environment suggests ongoing dollar weakness, making the downward trajectory of the index the path of least resistance. However, a surprisingly strong jobs report, in my view, could trigger a short-term spike in the dollar due to short-covering, although this rally may be brief and quickly fade.

In my opinion, the real test for the U.S. economy at this moment lies in the August NFP report. With expectations for 164,000 jobs to have been added last month, this figure could be the primary driver of near-term market direction. However, unexpected results could turn the markets on their head, just as we saw with the July report. A figure much higher than expected could suggest that the U.S. economy requires less support from the Federal Reserve, thereby easing recession fears. On the other hand, a much weaker report could send markets into a frenzy, forcing the Fed to take more aggressive action in cutting rates.

Meanwhile, U.S. Treasury yields on the 10-year bond fell to 3.70%, breaking below the key support level of 3.739%. In my view, this drop reflects increased demand for safe-haven assets amid expectations of weaker inflation data. With yields remaining below the 50-day exponential moving average of 3.814%, this points to further downside risks, with the next support around 3.667%. This decline in bond yields typically weakens the dollar, as it reduces its appeal to international investors seeking higher returns.

As a result, these developments may weaken the U.S. dollar, making it less competitive in global markets, while risk-sensitive assets like equities and commodities may benefit from this trend in the short term.