The Dollar Could Continue Deteriorating

The U.S. Dollar Index (DXY) rose by 0.30% this week to 98.94 points, while the EURUSD fell by 0.47% to 1.15400. The Dollar appeared overextended last week, and the expected downside correction in the EURUSD to the 1.15000–1.15500 range was exceeded largely due to the unfavourable EU trade deal. This initially sent the EURUSD down 1.27% to 1.15890 on July 28. Hopes for progress in U.S.–China trade talks drove the pair even lower to 1.15470 the next day. After Jerome Powell’s hawkish press conference on July 30, the decline turned into a rout. Weekly losses for the EURUSD reached 2.87% as it briefly dipped to 1.14000.

This move now seems like an overreaction, particularly in the low-liquidity summer period. Markets easily absorbed Thursday’s stronger-than-expected U.S. Personal Consumption Expenditures (PCE) inflation data, and the pair held above 1.14000 throughout that session. Then came Friday’s shock: the U.S. labour market report for July revealed just 73,000 new Nonfarm Payrolls (NFP), far below the 106,000 consensus. Even more striking was the sharp downward revision of June’s figure to only 14,000 from the previously reported 147,000. Unemployment ticked up to 4.2% from 4.1%. The data painted a far weaker picture of the U.S. labour market than previously assumed undermining Fed Chair Jerome Powell’s justification for a hawkish stance based on "strong" employment. A sharp repricing followed. Market expectations for a quarter-point rate cut in September surged from 41.3% to 88.1%.

President Trump reacted with fury. Shortly after the data release, he dismissed the Commissioner of the Bureau of Labor Statistics. In a surprising move, Fed voting member Adriana Kugler also resigned. The EURUSD quickly jumped 1.59% to 1.15960. But this could just be the beginning of a broader trend. The Euro is regaining ground. The first upside target now stands at 1.16500–1.17000. However, if the EURUSD sustains a breakout above 1.17000, a further rally to 1.19500–1.20500 becomes increasingly likely. This would require traders to fully price in not only a September rate cut, but also concerns about the independence of the Federal Reserve and the credibility of U.S. economic data.

Still, a geopolitical wild card remains. The U.S. and China have failed to extend their trade truce. The key sticking point is Washington’s demand that Beijing stop purchasing Russian oil to support a resolution of the Ukraine conflict. China refuses arguing that many Western countries continue to import Russian energy themselves. Tensions are rising and could culminate in sweeping 100% tariffs on China, India, and other nations still buying Russian oil, effective after the ceasefire deadline on August 8.

A similar event occurred in April 2025, when China retaliated against U.S. tariffs by selling U.S. Treasuries, sparking a steep sell-off in the Dollar. That month, the Greenback dropped over 7.0%. If tariffs are raised again, Beijing may repeat this move. Even without the support of the EU or Japan, the impact could still be significant.

Large investors remain cautious. The WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) showed neutral capital flows last week following three straight weeks of modest inflows. This signals a pause as investors await further clarity on both monetary policy and geopolitical developments.