Dollar Weakens as Fed Rate Cut Bets Intensify Amid Jobless Claims Surge

The U.S. dollar came under pressure on Friday as a jump in jobless claims and steady inflation data reinforced expectations of Federal Reserve interest rate cuts next week. The dollar index slipped to 97.585, heading for a second consecutive weekly decline after snapping a two-day rally on Thursday.

Labor market data revealed the sharpest weekly rise in jobless claims in four years, overshadowing consumer inflation numbers that showed prices increasing at their fastest pace in seven months but largely in line with forecasts. Investors now anticipate a 25-basis-point Fed rate cut on September 17, with futures markets pricing in a more cautious easing path for the remainder of the year, according to CME’s FedWatch tool. Hopes for a larger 50-basis-point cut have diminished as inflation risks linger.

U.S. Treasury yields held near 4.03% after briefly dipping below 4% for the first time since April. Market sentiment remains divided, with analysts noting uncertainty over the Fed’s next moves. “The market is at a crossroads,” said Tim Kelleher of Commonwealth Bank, highlighting the murky outlook.

Currency markets reflected the cautious mood. The dollar was steady against the yen at 147.27 after the U.S. and Japan reaffirmed their commitment to market-determined exchange rates. The euro eased to $1.1727 as traders scaled back expectations of another European Central Bank rate cut, with ECB President Christine Lagarde noting balanced risks for the eurozone economy. Sterling edged down to $1.3572, while the offshore yuan traded flat at 7.1135 per dollar.

Meanwhile, the Australian dollar strengthened slightly to $0.6665, hovering near a 10-month high, while the New Zealand dollar dipped to $0.5971.