The U.S. dollar slumped to a three-month low against major peers, with DXY shedding 1.2%, as markets priced in a 70% probability of a September rate cut following dovish Fed commentary and soft economic data, undermining the greenback's yield advantage.
The dollar index fell sharply as markets repriced Fed expectations, with a 70% chance of a September rate cut now priced in, down from 30% a week ago. Softer ISM services and ADP employment data accelerated the sell-off, pushing DXY to a three-month low of 101.50. Fed Chair Powell's dovish shift, calling further hikes 'not the base case,' has reinforced the bearish momentum.
Markets are forward-looking and are pricing in future rate cuts based on weakening economic data and dovish Fed guidance, which reduces the expected yield advantage of holding dollars.
DXY has breached the 50-day moving average at 102.00, with next support at the 100.00 psychological level. A bounce could face resistance at 102.50.
The trend could extend through the summer if U.S. data continues to disappoint, but a hawkish surprise from the Fed or strong NFP could reverse the move.
The euro surged to a six-week high above 1.10 as the interest rate differential narrowed sharply in its favor, with the ECB seen holding rates while the Fed pivots dovish. A break of the 1.0980 resistance triggered stop-loss buying, adding momentum.
The next significant resistance is at 1.1185, the March high. A sustained break above 1.10 could open a path to that level if U.S. data remains weak.
With the ECB likely to hold rates steady and the Fed expected to cut by 50 basis points by year-end, the 2-year yield spread has narrowed by 30 basis points this week, favoring the euro.
Gold prices rallied to a one-month high as a weaker dollar and falling U.S. real yields boosted demand for the non-yielding asset. The metal is also benefiting from haven flows amid rising recession fears.
Gold is responding to the expectation of falling real yields as inflation remains sticky while nominal rates are expected to decline, reducing the opportunity cost of holding gold.
A close above $1950 could open a move toward the $2000 psychological level, with support now at $1915.
The dollar index (DXY) tumbled 1.2% this week, erasing gains from the previous month, as markets priced in a 70% chance of a Fed rate cut in September. Soft U.S. economic data and dovish Fed commentary fueled doubts about the central bank's tightening resolve. Major currencies like the euro and yen rallied in response, with EUR/USD breaking above 1.10 for the first time in six weeks.
Growing doubts about the Fed's commitment to further tightening, fueled by softening economic data and dovish rhetoric, have led markets to price in multiple rate cuts, eroding the dollar's yield advantage.
The euro and yen are the primary beneficiaries, with EUR/USD gaining 1.8% and USD/JPY dropping 2.2% for the week, as interest rate differentials narrow.