Dollar Inch-By-Inch: Back Slightly, But Set for Weekly Drop as Fed Cuts Loom

Jobless Claims Surge Clouds Greenback, Markets Brace for Fed’s Next Move

The U.S. dollar nudged higher on Friday after two losing sessions, drawing brief support from rising inflation and a jump in jobless claims, but is still poised for a modest weekly decline as traders solidify expectations of a Federal Reserve rate cut.

Mixed Data Paints Murky Outlook

The latest report showed jobless claims jumped by the most in four years, reinforcing concern that the labor market is weakening. Meanwhile, U.S. inflation data for August revealed the fastest price gains in seven months, but still within market expectations, limiting the shock potential.

Dollar’s Moves: Gains Hollow, Losses Almost Certain

The dollar index rose ~0.1% to 97.66, after falling the previous day. However, it remains on track for a ~0.1% drop over the week, marking its second straight weekly loss. Treasury yields edged up slightly, with the benchmark 10-year yield climbing to ~4.0433%, continuing a volatile trend.

What’s Driving Fed Rate Cut Bets

Investors are focused on the Fed’s upcoming meeting (expected mid-September), with strong odds of a 25 basis point cut priced in. Earlier hopes for a larger 50 bps cut have dampened as labor data shows more signs of stress. Strategy teams note that “faster cuts” appear unlikely unless inflation remains very well-behaved.

Ripple Effects Across Currencies and Markets

• Euro & Other Majors: The euro weakened slightly (~0.1%) as expectations for ECB rate moves became more cautious.
• Emerging Markets & USD Pairs: Currencies like the Australian dollar remained near multi-month highs, benefiting from USD softness. Conversely, import-heavy economies face inflation risks.
• Bond Markets: Yields on U.S. Treasuries are under watch, modest upside in yields may follow if additional economic data undershoots. Longer maturities especially are sensitive to shifts in Fed guidance.

Risks That Could Rattle the Outlook

• Upside inflation surprises: If core inflation picks up or fails to moderate, it could force the Fed to delay rate cuts.
• Labor data surprises: A rebound in employment or wage pressure could upset the easing narrative.
• Central bank divergence: If the ECB or other major central banks tighten or signal hawkishly, that could reinforce USD strength.

In summary, while the dollar climbed slightly, recent data, especially swelling jobless claims and modest inflation, reinforce market expectations of imminent Fed cuts. The greenback may be punching up today, but the weekly trend looks set for a gentle decline. The core theme: mixed U.S. economic data is giving markets room to bet on easing, but any misstep could reshape the trajectory sharply.