Weekly Forex: US Dollar Index witness weekly decline

This past week, the US Dollar showed signs of instability as expectations for a forthcoming Federal Reserve rate cut influenced market sentiment. Amid worries about economic health and falling yields, the US Dollar Index (DXY) dipped, ending the week on a softer note, although it did manage a modest rebound towards the close.

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This past week, we saw the US Dollar waver as market sentiment geared towards an anticipated interest rate cut by the Federal Reserve. Amid concerns over economic stability and declining yields, the US Dollar Index (DXY) experienced a downturn, concluding the week on a weak note despite a slight recovery towards the end. The US Treasury yields have trended downward, underpinning the lower dollar valuation.

As we progress into next week, the economic calendar is loaded with potential market movers. We remain focused on the release of Wholesale Inventories and forthcoming industry reports that could steer inflation expectations. A significant event to watch is the release of inflation data on September 11, which could be pivotal for currency traders. Notably, the EURUSD pair hit a peak near 1.1160 this week but struggled to sustain these levels, indicating volatility remains.

The GBPUSD experienced its second consecutive week of decline, though it managed to rally on Friday. Conversely, the USDJPY persisted in its downward trajectory, touching four-week lows around 141.80. The AUDUSD was not spared from the bearish sentiment either, approaching lows not seen in three weeks.

In the midst of these market developments, the USDINR currency pair saw fluctuating fortunes. Starting strong early in the week, it reached a high of 83.8425, but later set a new record high at 83.9875, largely driven by robust dollar demand from oil importers. The Reserve Bank of India (RBI) possibly stepped in to prevent further falls, showing signs of active intervention in the forex market.

The focus was also on the US labor market, with several reports like JOLTs Job Openings and ADP Non-Farm Employment Change coming in below expectations. This data suggested a cooling off in the labor market, somewhat easing recession fears despite a rise in Average Hourly Earnings by 0.4%, indicating a possible slow deceleration in employment growth.

Following these labor market reports, the dollar index dropped to a one-week low of 100.58, but then regained some ground. The market’s expectations for a September rate cut by the Fed have been adjusted, with the likelihood of a 50-basis point reduction dropping from 41% to 30%.

Meanwhile, the Indian Rupee capitalized on gains seen in other Asian currencies, closing the week slightly higher at 83.94. India’s foreign exchange reserves reached a new peak, adding $2.299 billion, reflecting strong buffers against global economic shifts. With the reserves climbing over $60 billion in 2024, India remains well cushioned for now. This, along with the potential modest rate cut by the Fed in September, helps contain too sharp a depreciation in the Rupee.