Article Rewrite and Expansion Based on Original Source from Mitrade
Original Author: Mitrade News Desk
Original Link: https://www.mitrade.com/insights/news/live-news/article-1-1091186-20250903
Title: US Dollar Rally Cools as Markets React to Economic Data and Fed’s Policy Outlook
The US dollar experienced a moderation in its rally as investors reassessed their expectations about the Federal Reserve’s next policy moves. After weeks of steady gains fueled by hawkish Fed sentiment and resilient economic data, the greenback faced renewed scrutiny as signs of a slowdown in consumer spending and labor market softness began to emerge in recent reports.
This article examines the current state of the US dollar, key economic indicators influencing its direction, and the overall outlook as the Federal Reserve considers future rate hikes. Additional data from reliable sources such as the U.S. Bureau of Economic Analysis (BEA), the Federal Reserve, and commentary from financial strategists have been incorporated.
US Dollar Rally Decelerates
Following a multi-week uptrend that saw the US dollar appreciate against major global currencies, the greenback retraced some gains as it faced renewed selling pressure. The US Dollar Index (DXY), which tracks the performance of the dollar against a basket of major currencies including the euro, yen, and pound, had been trending above 104 for several days. However, by early September, the index displayed signs of consolidation around the 104.10 level, marking a stall in its bullish momentum.
Why the Dollar Pulled Back
Several interlinked factors contributed to the slowdown in the dollar’s momentum:
• Weak Economic Indicators: Recent data showed a slowdown in consumer spending and lower-than-expected job creation. Key indicators such as the August Non-Farm Payrolls report came in below expectations, further fueling concerns of an economic deceleration.
• Market Sentiment on Fed Policy: Investors are now pricing in a lower probability that the Federal Reserve will raise interest rates again in this cycle, expecting that the central bank may opt to pause or even cut rates well into 2024 if economic headwinds grow stronger.
• Lower US Treasury Yields: Bond yields slightly retreated as investors sought safety amid economic concerns. Lower yields make the dollar less attractive to foreign capital, reducing upward pressure on the currency.
Fed’s Balancing Act Amid Economic Uncertainty
At the heart of the dollar’s mixed performance lies the Federal Reserve’s evolving policy stance. The Fed has raised rates aggressively since early 2022 in a bid to tame inflation, raising the federal funds rate to a range of 5.25–5.50 percent by mid-2023. However, speeches and comments from various Federal Reserve officials now suggest a more cautious approach.
Key points from recent Fed communication:
• Chairman Jerome Powell emphasized a “data-dependent” strategy, noting that while inflation remains above the 2 percent target, restrictive policy may now have sufficient time to work through the economy.
• Fed Governor Christopher Waller mentioned that if inflation continues to decelerate, holding rates steady may be sufficient.
• The Federal Reserve Bank of Cleveland President Loretta Mester indicated she favors keeping rates “higher for longer,” but remains open to adjustments if incoming data suggests rising risks to growth or employment.
Labor Market Under Scrutiny
Markets are paying close attention to the labor market as a key determinant of Fed policy. August’s Non-Farm Payroll Report, released by the Bureau of Labor Statistics, showed softer momentum:
• Non-Farm Payrolls rose by 187,000 jobs in August, below the 200,000 consensus estimate.
• Unemployment rate ticked up to 3.8 percent from 3.5 percent, its highest level since February 2022.
• Average hourly earnings rose by just 0.2 percent month-on-month, also indicating a moderation from earlier wage inflation.
While the job market remains relatively robust, the signs of softening suggest that previous rate hikes may be effectively slowing demand,
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