Dollar Trades Softly as Economic Jitters and ECB Rate Cut Weigh on Sentiment

The U.S. dollar held steady in quiet trading on Thursday, subdued by weak economic data that reignited fears of stagnant growth and sticky inflation, while the euro hovered near recent highs ahead of a widely anticipated rate cut from the European Central Bank.

Recent U.S. data painted a fragile picture, with the services sector contracting in May for the first time in nearly a year and signs of a cooling labour market emerging. The downbeat figures drove a rally in Treasuries and heightened expectations that the Federal Reserve will initiate interest rate cuts later this year.

Asian trading hours saw only modest currency moves, with investors displaying caution and refraining from major positions as they awaited further developments related to economic indicators, trade tensions, and tariff announcements. Markets have remained unsettled since April 2, when U.S. President Donald Trump imposed a new round of global tariffs—only to delay some and float others—prompting investors to seek alternatives to U.S. assets amid policy unpredictability.

The dollar's underperformance has become one of the defining trends of the year. According to a Reuters poll of foreign exchange strategists, the currency is expected to continue weakening due to deepening concerns over the ballooning U.S. federal deficit and rising debt levels.

On Thursday, the dollar edged slightly higher against the yen, trading at 143. The euro remained firm at $1.1412, close to the six-week high it had reached earlier in the week. Sterling was last seen at $1.3544. Meanwhile, the dollar index, which measures the greenback against a basket of six major currencies, stood at 98.87. That marks an approximate 9% decline year-to-date, placing the currency on track for its weakest annual performance since 2017.

Attention now turns to Friday’s monthly payrolls report, which investors are closely monitoring for signs of continued labour market deterioration. Earlier this week, payroll processor ADP reported a smaller-than-expected gain in private sector jobs for May. Economists surveyed by Reuters forecast the upcoming non-farm payrolls report will show an increase of 130,000 jobs for May, down from April’s 177,000 gain. The unemployment rate is projected to remain unchanged at 4.2%.

“May’s payrolls data tomorrow will be important to see if investor concerns are valid or overdone. A soft labour market report is likely to result in outsize falls in the U.S. dollar,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

President Trump escalated his pressure campaign on the Federal Reserve Wednesday, renewing his public calls for Chair Jerome Powell to cut interest rates. The appeal came shortly after the ADP data release and added fuel to market worries about the independence of the U.S. central bank.

Markets are currently pricing in 56 basis points of rate cuts by the Fed this year, with LSEG data indicating a 95% probability of a rate reduction by September. The yield on the benchmark U.S. 10-year Treasury note was at 4.363% during Asian hours, just above Wednesday’s four-week low of 4.349%.

In the Asia-Pacific region, the Australian dollar remained flat at $0.6491 despite a weak GDP print earlier in the week. The New Zealand dollar was last at $0.603, hovering near a seven-month high.

Market participants remain deeply concerned over the lack of headway in U.S. trade talks. With a July deadline approaching, no significant progress has been made. On Wednesday, Trump referred to China’s President Xi Jinping as “tough” and “extremely hard to make a deal with,” casting doubt on earlier optimism surrounding a possible phone conversation between the two leaders.

Eyes are also on Europe, where the ECB is expected to lower interest rates by 25 basis points later Thursday. Although the rate cut is seen as a given, investors are primarily focused on signals from the ECB about what might follow. With inflation coming down from pandemic-era highs, the bank has already slashed rates seven times over the past 13 months in an effort to bolster a sluggish eurozone economy—one that was already faltering before being further destabilized by Trump’s chaotic economic and trade maneuvers.

“Lower energy prices, forthcoming fiscal stimulus, and reduced global recession risks warrant a wait-and-see approach to further policy moves,” said Laura Cooper, head of macro credit and investment strategy at Nuveen. “While a potential insurance cut could come in September, it will be contingent on incoming data – yet risks appear skewed to the upside amid depressed trade-led expectations.”

By fLEXI tEAM