Where to begin
The US Dollar Index (DXY) opened the week on a stronger note, rebounding after a modest pullback, trading near 99.70 during the Asian session. Recent dollar movements are influenced by two factors: cooling US job market conditions reducing the likelihood of near-term Fed rate hikes, and global risk events driving safe-haven flows into the greenback, providing support.
Why just these two key drivers?
The market's focus remains on developments in the Middle East. The US-Iran situation has entered a critical phase, with negotiations over the Strait of Hormuz management drawing market attention. While Iran indicates talks are progressing under Omani mediation, markets remain cautious about the pace of shipping recovery. Energy supply risks and regional uncertainty continue to boost the dollar's safe-haven appeal.
US employment data has become a core factor influencing the dollar's recent trajectory. Data shows the US economy lost 23,000 jobs in July, significantly weaker than expectations, while June's figure was sharply revised down from an increase of 57,000 to just 20,000 jobs. The softening labor market has intensified, prompting investors to reassess the Fed's future policy path. Following the jobs report, markets significantly lowered expectations for a September rate hike. According to market rate tools, investors now see roughly a 46% probability of a 25-basis-point hike in September, down from 67% a week ago. Cooling Fed rate hike expectations limit further upside for the dollar.
However, the dollar has not experienced a sustained sharp decline, primarily due to persistent safe-haven demand. Additionally, markets believe changes in energy prices could influence future inflation trends. If crude oil prices rise further due to supply risks, inflation pressures could re-emerge, potentially slowing the pace of Fed policy shifts and providing some support for the dollar.
Market perspective and outlook
TD Securities notes that US rate markets experienced a "bull steepening" following the weak jobs data, with investors reducing bets on future rate hikes. Markets believe the uncertainty around the September policy path is decreasing, but upcoming inflation data will determine whether the Fed needs to maintain restrictive policy for longer. Fed official Barkin recently offered relatively dovish comments, noting that the jobs data shows the labor market is in a "low hiring, low firing" weak equilibrium, not a clear recession. He also emphasized that corporate earnings remain strong, and if job weakness does not spread further, economic resilience could limit the Fed's ability to quickly pivot to easing.
The Fed's overall policy stance remains cautious. Relevant market indicators show the Fed's policy sentiment index has declined but remains significantly above neutral levels, suggesting markets still expect monetary policy to stay restrictive in the near term. Investors are awaiting the US inflation report to gauge the direction of future rate adjustments.
On the daily chart, the Dollar Index has rebounded after finding support near 99, maintaining a relatively strong oscillating trend. Upside resistance is seen in the 100.20 to 100.50 zone; a break above could lead to a test of the 101.00 area. Downside support is at 99.00 and 98.30. The daily chart shows that while the dollar is pressured by job data, safe-haven flows help it retain some upward momentum. On the 4-hour timeframe, the DXY has formed a short-term rebound structure, with the price returning to near 99.70. Technical indicators show short-term buying interest has recovered. However, resistance near the psychological 100.00 level persists; if it fails to break, the dollar may retest support at 99.00. A successful break above 100.20 could open room for further gains. Future direction will focus on US CPI data, Treasury yield changes, and global risk developments.
Final take
The Dollar Index is currently under the dual influence of "weak economic data" and "safe-haven demand support." Cooling US job market conditions lower the near-term Fed rate hike expectations, pressuring the dollar, but geopolitical risks, energy market volatility, and inflation uncertainty continue to provide support. In the short term, the dollar may maintain a range-bound pattern, with the market direction depending on whether US inflation data further reinforces rate cut expectations. If inflation continues to decline, the dollar could face headwinds; if energy prices stoke inflation risks, expectations for the Fed to maintain high rates could strengthen, supporting a dollar rebound.