The U.S. dollar is poised for a weekly loss as signs of fragility in the U.S. economy and stalled trade negotiations with key global partners weigh heavily on investor sentiment.
With a critical U.S. nonfarm payrolls report due later today, markets are bracing for further insights into the health of the world’s largest economy, particularly in the face of ongoing economic headwinds fueled by President Donald Trump’s tariff policies.
The dollar’s struggles come as a string of weaker-than-expected U.S. economic data this week has amplified concerns about slowing growth. Reports on manufacturing activity, consumer confidence, and jobless claims have all pointed to mounting pressures, with analysts attributing much of the decline to Trump’s aggressive tariff measures, which have disrupted supply chains and increased costs for businesses and consumers alike.
These measures, aimed at reshaping global trade dynamics, have yet to yield significant breakthroughs in negotiations with major trading partners, including China, as deadlines loom.
A highly anticipated phone call between Trump and Chinese President Xi Jinping on Thursday, lasting over an hour, briefly lifted hopes for progress in U.S.-China trade talks.
The discussion sparked a late rally in most major currencies against the dollar, though gains were later pared as traders adopted a cautious stance ahead of the payrolls data.
Against a basket of currencies, the dollar index edged up to 98.85 in Asian trading but remains on track for a weekly decline of 0.6%, reflecting the broader bearish sentiment.
Nonfarm Payrolls in Focus
The spotlight now falls on the U.S. nonfarm payrolls report, due for release later today, which economists expect to show an increase of 130,000 jobs for May, with the unemployment rate holding steady at 4.2%.
However, some analysts warn of downside risks, with the potential for the unemployment rate to tick up to 4.3%. “The softness we’ve seen in the data this week has probably been more responsible for rejuvenating the bearish U.S.
dollar narrative than anything else,” said Ray Attrill, head of FX research at National Australia Bank. “The payrolls report will be pivotal in determining whether this narrative gains further traction or if we see a reversal.”
Market participants are particularly attuned to the report following this week’s disappointing economic indicators. A weaker-than-expected payrolls figure could intensify pressure on the Federal Reserve to consider more aggressive monetary policy easing, further undermining the dollar.
Conversely, a stronger report could provide temporary relief, though analysts caution that the broader economic challenges posed by tariffs and global uncertainties may limit any dollar rebound.
Global Currencies React
In the Asian session, most currencies traded within tight ranges as traders awaited the payrolls data. The euro held steady at $1.1436 after climbing to a 1-1/2-month high in the previous session, buoyed by hawkish comments from European Central Bank (ECB) President Christine Lagarde.
At the ECB’s latest policy meeting, Lagarde signaled a cautious approach to further rate cuts, prompting markets to reassess expectations for monetary policy in the Eurozone.
“We are inclined to treat Lagarde’s hawkishness with a degree of caution,” said Nick Rees, head of macro research at Monex Europe. “However, given this shift in tone, we no longer see our previous forecast for a 1.50% terminal rate as the most likely outcome.”
Rees now anticipates just one additional rate cut in September, bringing the ECB’s deposit rate to 1.75%, a move that could bolster the euro in the near term.
Sterling, meanwhile, remained near a three-year high at $1.3576, poised for a weekly gain of approximately 0.9%. The British pound has benefited from relative stability in the UK economy and optimism surrounding post-Brexit trade arrangements, though analysts warn that global uncertainties could cap further gains.
The Japanese yen, however, weakened slightly, falling 0.27% to 143.93 per dollar, as Japan grapples with its own economic challenges and the Bank of Japan’s ultra-loose monetary policy continues to weigh on the currency.
Trade Tensions and Economic Outlook
The lack of progress in trade negotiations remains a key driver of market sentiment. Trump’s tariffs, which have targeted a wide range of goods from steel to electronics, have sparked retaliatory measures from trading partners, further clouding the global economic outlook.
While the recent call between Trump and Xi offered a glimmer of hope, no concrete agreements were announced, leaving markets on edge as deadlines for new tariff impositions approach.
Analysts warn that prolonged trade tensions could exacerbate the U.S. economy’s vulnerabilities, particularly if combined with disappointing labor market data. “The payrolls report is a critical piece of the puzzle,” said Attrill. “If it confirms the weakness we’ve seen elsewhere, it could solidify expectations of a more dovish Fed and a weaker dollar in the weeks ahead.”
WHAT YOU SHOULD KNOW
As markets await the jobs data, the dollar’s trajectory remains uncertain. For now, the currency’s fate hinges on the interplay of domestic economic indicators and the broader geopolitical landscape, with traders and policymakers alike bracing for what lies ahead.
