Title: US Dollar Weakens as Markets Price in Three Fed Rate Cuts Amid Soaring Jobless Claims
Original Author: James Elliot
Source: ExchangeRates.org.uk
Publication Date: September 13, 2025
The US dollar lost momentum as markets began pricing in a more dovish stance from the Federal Reserve, responding to the latest batch of economic data that points to a potential slowdown in the US economy. Most notably, jobless claims surged to their highest level in more than four years, providing further evidence that cracks are forming in the once-resilient labor market.
Federal Reserve expectations shifted significantly in response to the increase in unemployment claims, with the market now pricing in three potential interest rate cuts by mid-2026. As investor sentiment soured over the health of the economy, the dollar retreated against a basket of major currencies.
According to James Elliot of ExchangeRates.org.uk, the abrupt rise in jobless claims has become a significant economic signal, forcing traders and economists alike to reassess their outlook for US monetary policy. The market now anticipates a notable change in the Federal Reserve’s trajectory in the coming months.
Key Economic Developments and Market Reactions
The rapid shift in expectations for the Federal Reserve’s policy rates is rooted in numerous economic indicators pointing to a cooling US economy:
– Initial jobless claims rose to 329,000 in the week ending September 7, 2025, a significant increase from 320,000 the previous week.
– This level of claims has not been seen since early 2021, suggesting growing weakness in the labor market.
– The four-week moving average, a preferred measure for assessing jobless claim trends, also rose to 320,250.
– Continued jobless claims climbed to 1.78 million, reinforcing the view that layoffs have increased and displaced workers are having difficulty returning to the workforce.
– The unemployment rate, as reported earlier through non-farm payroll data, ticked higher to 4.1 percent in August—up from 3.8 percent in July.
– US GDP growth was revised downward for Q2 of 2025, from 2.2 percent to 1.8 percent, showing that the broader economy is losing steam.
These indicators combined have shifted Wall Street sentiment away from hawkish monetary policy. Now, analysts believe the Federal Reserve will be compelled to ease rates in an attempt to support employment and ensure growth does not stall completely.
Federal Reserve Rate Cut Expectations
At the beginning of 2025, the general expectation among investors and analysts had been that the Federal Reserve would leave interest rates elevated through most of the year to combat inflation. However, the economic reality has caused a dramatic reassessment.
Markets are now pricing in the following:
– A nearly 100 percent probability of a rate cut at the January 2026 FOMC meeting.
– A total of 75 basis points of cuts expected by mid-2026, distributed over three successive FOMC meetings.
– Futures contracts for the Federal Funds Rate show expectations for the benchmark rate to fall from its current level of 5.50 percent to 4.75 percent within nine months.
This repricing has had an immediate impact on currency markets. The dollar index (DXY), which tracks the greenback against six major currencies, declined from 104.9 to 103.6 over the week. Major currencies, especially those backed by central banks still cautious about monetary easing, saw gains against the dollar.
Impact on Major Currency Pairs
The softer dollar reverberated across the global currency markets, impacting several high-visibility USD currency pairs:
– EUR/USD rose above 1.10 for the first time since June, as the European Central Bank holds a more restrictive monetary policy stance despite signs of slowing eurozone growth.
– GBP/USD climbed to 1.29, thanks to relatively strong macroeconomic data from the UK and expectations that the Bank of England will remain cautious about cutting interest
Read more on EUR/USD trading.