US Dollar extends decline as NFP takes centre stage

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, slides below 99.00 to its lowest level in over a week on Thursday. At the time of writing, DXY trades around 98.90, down 0.67% on the day, after reaching 99.86 on Wednesday.

A sharp rally in the Japanese Yen (JPY) leads the Greenback’s decline. USD/JPY falls for the second consecutive day, down around 2% at the time of writing and trading near 155.45, its lowest level in a month and close to the post-July coordinated intervention low of 155.24. The Yen’s quick move has sparked fresh intervention speculation, including talk of a possible rate check, but there has been no confirmation from Japanese authorities.

A modest pullback in US Treasury yields also weighs on the US Dollar. Yields retreat across the curve from recent highs, with the benchmark 10-year yield trading around 4.75% after touching 4.81% on Wednesday, its highest level since October 2023.

Selling pressure on the Greenback gathered pace following less-hawkish comments from Federal Reserve (Fed) Governor Christopher Waller, prompting traders to scale back bets on a rate hike at the September 15-16 meeting. Waller said he is “finally seeing some signs of disinflation,” adding: “Give disinflation a chance; we can wait one meeting.” However, he warned that if the trend reverses in August, he would be “willing to pull the trigger on a rate hike.”

According to the CME FedWatch Tool, the probability of a rate hike at the September meeting has fallen to around 50% from 63% a day earlier.

Traders largely shrug off Thursday’s US economic data. Initial Jobless Claims rose to 206K, slightly above expectations of 205K, while the ISM Services Purchasing Managers Index (PMI) increased to 55.4 in August from 54.1 in July, beating the market forecast of 54.3.

The US Dollar now faces a crucial test from Friday’s Nonfarm Payrolls report

The US economy is expected to add 58K jobs in August after shedding 23K in July, while the unemployment rate is forecast to hold at 4.1%. Markets will also closely examine wage growth and revisions to previous payroll figures after employment gains for May and June were revised down by a combined 103K in the July report.

A stronger-than-expected report could revive expectations of a September rate hike and help the US Dollar regain ground. Conversely, another weak payroll print or sharp downward revisions would strengthen the case for the Fed to keep rates unchanged, leaving DXY vulnerable to a deeper decline.