FX.co ★ Dollar Drops Amidst Renewed Rate Cut Hopes

During the week ending July 5, the U.S. Dollar experienced a notable decline, driven by weak economic data from the U.S. which fueled expectations of a potential rate cut by the Federal Reserve. The dollar weakened against multiple currencies, including the euro, pound, Australian dollar, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc.

The Dollar Index (DXY), which measures the Dollar's strength against a basket of six currencies, dropped over the week from July 1 to 5. Closing at 105.87 on the last Friday of June, the DXY fell to 104.88 by the first Friday of July. Although the index slightly increased by the close on Monday, it then declined for the rest of the week, resulting in a 0.94 percent weekly drop. The index fluctuated between a high of 106.05 and a low of 104.82.

On Monday, data from the Institute for Supply Management revealed a surprise decline in the Manufacturing PMI for June to 48.5 from 48.7 in May, missing market expectations of 49.1. This marked the third consecutive month of reduced manufacturing activity and the lowest reading since February, bolstering the view that the Federal Reserve had room to lower interest rates from their current high level.

The dollar further weakened following Federal Reserve Chair Jerome Powell's remarks at the European Central Bank's Forum on Central Banking on Tuesday, where he acknowledged disinflationary trends in the U.S. economy.

Despite this, the DXY reached a high of 106.05 on Tuesday, buoyed by data showing an increase in job openings to 8.14 million in May from a three-year low of 7.92 million in April, surpassing market expectations of 7.91 million.

The dollar continued to retreat on Wednesday amid less hawkish Federal Open Market Committee (FOMC) minutes and a disappointing Services PMI reading. The FOMC minutes indicated that Fed officials recognized easing price pressures, while the ISM Services PMI recorded a lower-than-expected reading of 48.8, compared to market anticipation of a decline to 52.5 from 53.8 in the previous month.

Data published by the U.S. Bureau of Labor Statistics on Friday morning showed the American economy added 206,000 non-farm payrolls in June, exceeding market expectations of 190,000 but falling short of the 218,000 additions recorded in May. Additionally, the unemployment rate unexpectedly rose to 4.1 percent, marking a steady increase from previous months: 3.8 percent in March, 3.9 percent in April, and 4 percent in May. This trend further solidified expectations of a rate cut by the Federal Reserve, as the rising unemployment rate reflected weakening labor market conditions.

The euro gained 1.15 percent against the dollar during the week ending July 5, supported by reduced fears of a far-right electoral victory in France. Comments from the European Central Bank (ECB) President, indicating no rush to cut rates, and ECB minutes which reflected hesitancy over rate cuts, also contributed to the EUR/USD pair rising to 1.0836 from 1.0713 the previous week. The euro fluctuated between $1.0709 and $1.0843 during this period. Regional data indicated inflation as expected, declining to 2.5 percent in June from 2.6 percent in May.

The British pound rallied over one percent against the dollar, driven by the Labour Party's landslide victory in U.K. elections. The sterling rose from $1.2642 to $1.2808, an increase of 1.31 percent over the week. The GBP/USD pair ranged between a low of 1.2614 and a high of 1.2819.

The Australian dollar also advanced during the past week, influenced by Reserve Bank of Australia (RBA) minutes highlighting concerns about inflation risks. The AUD/USD pair ranged between 0.6633 and 0.6754, with a weekly gain of 1.23 percent, moving from 0.6667 on June 28 to 0.6749 on July 5.

The Japanese yen appreciated against the U.S. dollar over the week from July 1 to 5. The USD/JPY pair decreased from 160.83 on June 28 to 160.72, fluctuating between 162.01 and 160.34 amid weak economic data and diminishing expectations of monetary policy tightening by the Bank of Japan.

With recent indications of a cooling labor market in the U.S., market focus now shifts to upcoming consumer price and producer price inflation updates. Amidst these influences, the Dollar Index remained relatively steady at 104.85. The EUR/USD pair increased to 1.0842, the GBP/USD pair rallied to 1.2839, the AUD/USD pair stayed flat at 0.6749, and the yen's strength pulled the USD/JPY pair down to 160.61.