The U.S. dollar index edged lower during Friday's Asian trading session, giving back some of its gains from the previous two days, and is currently trading near 97.90. Market sentiment remains cautious as investors await the preliminary reading of the University of Michigan's February Consumer Sentiment Index, seeking clues on the U.S. economic outlook and inflation expectations.
Recent U.S. labor market data has generally been weaker, putting pressure on the dollar. According to the U.S. Labor Department, initial jobless claims for the week ending January 31 rose to 231,000, exceeding both market expectations and the previous figure.
Additionally, ADP data showed that U.S. private sector employment increased by only 22,000 in January, significantly below market forecasts. This series of figures reinforces the view that the U.S. job market is gradually cooling and has bolstered investor bets that the Federal Reserve will begin an interest rate cutting cycle within the year.
Based on current market pricing, traders widely anticipate the Fed will implement two rate cuts this year, with the first potentially starting in June, followed by another possible adjustment in September.
The CME FedWatch Tool indicates an nearly 80% probability that the Fed will keep rates unchanged at its March meeting. However, the downside for the dollar remains limited. Recent cautious remarks from some Fed officials, emphasizing that policy should not be relaxed prematurely until clearer signs of disinflation emerge, have provided some support.
Fed Governor Lisa Cook noted that, with the downward trend in inflation not yet fully confirmed, concerns about stalled disinflation outweigh worries about labor market weakness, a stance that underpins the dollar to some extent.
Furthermore, markets are digesting the implications of Kevin Warsh's reported nomination for the next Fed Chair. Seen as favoring a smaller balance sheet and a relatively restrained approach to rate cuts, this expectation has not only alleviated concerns about the Fed's independence but also provided underlying support for the dollar.
From a technical perspective, the dollar index has entered a consolidation phase after a consecutive rebound, remaining within a short-term upward channel. The current price is oscillating around 97.90, with the 98.30–98.50 zone representing a significant near-term resistance area, corresponding to a previous high concentration zone. A failure to break above this level convincingly could limit near-term upward momentum. On the downside, 97.40 serves as initial support. A more pronounced pullback could see the 97.00 psychological level become a key defensive area; a breach below this might lead the index to test around 96.50. Overall, amid a mix of supportive and limiting fundamental factors, the dollar index is more likely to continue trading in a high-level range between 97.00 and 98.50 in the near term.
The current movement of the dollar index reflects market speculation focused on the "timing of rate cuts" rather than "whether cuts will happen." While cooling employment data has indeed weakened the dollar's upward momentum, the Fed's cautious stance on inflation and restored confidence in its policy independence make a sustained downward trend unlikely. Until key economic data provides greater clarity, the dollar index is expected to maintain a relatively strong, consolidative pattern, with short-term fluctuations primarily driven by data releases and shifts in policy expectations.
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