The U.S. dollar strengthened on Monday, bouncing back after last week’s steep decline triggered by Federal Reserve Chair Jerome Powell’s unexpectedly dovish remarks.
Powell’s comments had fueled investor bets that the Fed could move ahead with a rate cut as soon as September, but markets are now cautiously reassessing how firm that expectation really is.
The dollar index, which tracks the greenback against a basket of major currencies, rose 0.49% to 98.32, marking its biggest daily percentage gain since late July. The euro slipped 0.69% to $1.1634 after touching a four-week high of $1.1742 last Friday, reflecting the dollar’s broad-based recovery.
Leading brokerages including Barclays, BNP Paribas and Deutsche Bank continue to project a 25-basis-point rate cut in September. Powell’s warning that risks to the U.S. labor market were rising strengthened those bets, although he also stressed that inflation remained a persistent concern. Analysts say upcoming economic releases – including this week’s Core PCE inflation report, next week’s jobs data, and August’s CPI – will play a critical role in shaping the Fed’s next move.
“Markets are realizing that a September cut isn’t guaranteed,” said Matt Weller, global head of market research at StoneX. “If incoming data points to stubborn inflation or mixed signals on jobs, policymakers could delay, prompting traders to hedge against a possible hold.”
According to CME’s FedWatch tool, traders priced an 84.3% probability of at least a quarter-point cut in September, a slight dip from 84.7% the previous session but significantly above the 61.9% seen a month ago. Still, the dollar has weakened by more than 9% this year, while the euro has gained over 12%, underscoring the broader downward trend for the greenback.
Euro zone bond yields ticked higher Monday, reversing last week’s drop, as markets weighed Fed implications alongside German business sentiment data that showed a modest improvement. Germany’s 10-year yield climbed nearly 4 basis points to 2.758%, approaching last week’s five-month high. U.S. Treasury yields also moved up slightly, with the two-year yield – highly sensitive to Fed expectations – rising 4 basis points to 3.728%.
Adding political uncertainty, U.S. President Donald Trump’s renewed attacks on Powell and speculation over his possible replacement have raised concerns about central bank independence. White House economic adviser Kevin Hassett said any decision on new Fed leadership could take months. Analysts at Goldman Sachs warned that efforts to reshape the Fed may weigh on longer-dated Treasuries, with the 30-year yield edging up to 4.8836%.
Investors now turn to Friday’s PCE inflation reading and next week’s August payrolls for the clearest signals on the Fed’s trajectory. Until then, the dollar’s rebound suggests traders are hedging against both outcomes – a decisive cut or a cautious pause.
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