Dollar Slips Amid Fed Rate Cut Bets and ECB Decision Awaited

The U.S. dollar hovered in muted trading Thursday after weak economic data revived fears of stagflation, raising expectations for Federal Reserve rate cuts. The greenback struggled after U.S. services sector activity unexpectedly contracted in May, while labor market data pointed to cooling job growth. These developments boosted Treasury demand, with the 10-year yield falling to 4.363%, near a four-week low.

Markets are now eyeing Friday’s U.S. non-farm payrolls report, expected to show a modest gain of 130,000 jobs. A weak report could accelerate the dollar’s decline. Currently, traders have priced in 56 basis points of Fed cuts for 2025, with a 95% chance of easing in September, according to LSEG data. President Trump also renewed pressure on the Fed to lower rates, unsettling investor confidence in the central bank’s independence.

In currency markets, the dollar edged up to 143 yen. The euro traded at $1.1412, near a recent six-week high, while the British pound held at $1.3544. The dollar index stood at 98.87, down roughly 9% year-to-date—its worst annual performance since 2017.

Investors remain cautious due to uncertainty surrounding U.S. trade policy. Markets await updates on the upcoming call between Trump and Chinese President Xi Jinping amid escalating tariff tensions.

Meanwhile, the European Central Bank is widely expected to cut interest rates by 25 basis points on Thursday, marking its eighth cut in 13 months. Investors are watching closely for signals on whether further easing will follow as inflation slows and recession risks fade.

The Australian dollar held at $0.6491 despite soft GDP figures, while the New Zealand dollar hovered at $0.603, near a seven-month peak. Overall, forex markets remain cautious, awaiting key economic cues and central bank moves.