US Dollar Index languishes near mid-106.00s on softer bond yields, downside seems limited

• The US Dollar drifts lower for the second straight day and is pressured by retreating US bond yields.
• Wednesday US macro data forced investors to trim bets for more aggressive tightening by the Fed.
• The markets are still pricing in at least one more rate hike in 2023, which should limit the USD slide.

The US Dollar Index (DXY), which tracks the Greenback against a basket of currencies, trades with a negative bias for the second straight day and languishes near the overnight swing low during the Asian session on Thursday. The index, however, manages to preserve some of its weekly gains to a nearly 11-month top touched on Tuesday as traders look for fresh cues about the Federal Reserve's (Fed) next policy move.

The US ADP report released on Wednesday showed that private-sector employers added 89K jobs in September, missing expectations and marking a sizeable drop from August's upwardly revised reading of 180K. Adding to this, the US ISM Services PMI declined from 54.5 to 53.6 in September, giving the Fed some incentive to stop raising interest rates. This leads to a further decline in the US Treasury bond yields and prompts some follow-through USD profit-taking,

The recent comments by several Fed officials, meanwhile, backed the case for further policy tightening to bring inflation back to the 2% target. This comes on the back of the Fed's hawkish outlook and higher-for-longer interest rates narrative. Moreover, the markets are still pricing in the possibility of at least one more lift-off by the end of this year. This, in turn, should limit any further decline in the US bond yields and act as a tailwind for the USD, warranting caution for bearish traders.

Investors might also prefer to wait on the sidelines ahead of the closely-watched US monthly jobs data on Friday. The popularly known NFP report will play a key role in influencing market expectations about the Fed's future rate-hike path and determine the near-term trajectory for the USD. In the meantime, Thursday's release of the usual Initial Weekly Jobless Claims data from the US, along with the US bond yields, should provide some impetus later during the early North American session.

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