Dollar Eases Its Rally: Can Economic Data Revitalize the Upward Trajectory?

By 10:00 ET (14:00 GMT), the US Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.1% to 104.105, retreating from Monday’s three-month peak.

Recent Dollar Performance and Market Sentiment

The dollar has been on an upward trajectory in recent weeks, gaining approximately 4% since its mid-July low. This surge was primarily fueled by robust U.S. economic data, which diminished expectations for aggressive Federal Reserve interest rate reductions.

However, traders now appear to be waiting for fresh economic indicators to determine whether this rally has further room to run.

“The dollar needs another boost, likely in the form of stronger US data, before it can sustain another leg higher,” analysts at ING noted in a research report. “For now, we continue to see stronger US data as dollar-supportive, although we acknowledge the risk that the FX market may soon start to worry about US overheating risks.”

Key Currency Pairs Movement

EUR/USD rose 0.2% to 1.0826, rebounding from a three-month low reached earlier this week. The European currency found some support after data showed German producer prices climbed by 0.2% in July, marking the first monthly increase in 2024.

GBP/USD traded 0.2% higher at 1.2868, recovering from Monday’s three-month low. The pound gained momentum after data indicated that UK government borrowing decreased more than anticipated in July, potentially providing the new Labour government with additional fiscal flexibility.

USD/JPY dipped 0.1% to 146.68, with the yen showing resilience despite comments from Bank of Japan Governor Kazuo Ueda suggesting that interest rates would rise gradually, contingent on economic and price developments.

Economic Indicators on the Horizon

Market participants are now focusing on the release of the Federal Reserve’s latest meeting minutes on Wednesday and Chair Jerome Powell’s speech at the Jackson Hole symposium on Friday for additional insights into monetary policy direction.

Additionally, preliminary August purchasing managers’ index data from both the U.S. and Europe, scheduled for release on Thursday, will be closely scrutinized for signs of economic momentum.

In emerging markets, USD/CNY rose 0.1% to 7.1463 after the People’s Bank of China left its benchmark lending rates unchanged, as anticipated. The Chinese central bank is navigating a delicate balance, attempting to stimulate growth without further weakening the yuan.

Market Outlook

Analysts remain divided on the dollar’s trajectory, with some suggesting the currency may need stronger economic indicators to sustain its upward momentum, while others point to relative U.S. economic strength as a continuing supportive factor.

“The market appears to be in a holding pattern, awaiting clearer signals from economic data and central bank communications,” market strategists observed. “While the dollar’s fundamental position remains relatively strong, the pace of appreciation may moderate without fresh catalysts.”