Since the end of last year, the US dollar has fallen from its historic highs down to the resistance zone within this cycle of the dollar. During this period, this decline has helped major countries, including emerging markets and emerging assets, to experience significant rebounds. From a technical perspective, the dollar remains near the upper boundary of a longstanding ascending channel formed over the past decade, making a rebound possible.
Figure 1: The Dollar Has Not Broken Below the Upward Channel Since 2011 (DXY)
However, at the Jackson Hole meeting on August 22, Powell’s dovish speech solidified the market’s conviction in a rate cut in September (with an 86.2% probability, see Figure 2), which has kept the dollar under pressure and pushed it below the July rebound trendline (see Figure 3).
Figure 2: CME FedWatch Tool — Probability of Fed Rate Cuts Over the Next Year
(Data shows a high chance of rate cuts starting September 17, 2025, with probabilities gradually evolving over the next year)
Figure 3: Post-Jackson Hole, the Dollar Index Broke Below Short-Term Support Formed This Summer
Current observations indicate that the dollar index sits at a crossroad: it maintains long-term support with some rebound potential (Figure 1) but is, in the short term, trending downward (Figures 2 and 3). This situation suggests the dollar will face a directional decision within the coming weeks.
When technical and fundamental factors diverge so significantly—either leading to a major technical breakout or rebound—it is necessary to consider two possible scenarios: Will the dollar continue its steady decline to 80, or will it return to a moderate strength zone between 96 and 106?
First, let’s examine inflation. The inflation situation in the US is still not optimistic. Core services inflation remains steady above 3.5%, with sticky wage pressures persistent. On top of that, tariffs continue to push core goods CPI upwards.
Figure 4: US Inflation Still Not Optimistic
(Core Services and Core CPI Year-over-Year trends demonstrate persistent price pressures)
More notably, producer price index (PPI) data, particularly the "trade services" segment, rose sharply by 10% year-over-year, signaling corporate profitability gains. Most US industries lack intense competition, and market leaders exercise oligopolistic pricing power. Although these levels have not yet returned to the “greedy inflation” highs seen during the pandemic, companies are significantly raising prices to expand profit margins. Considering the correlation with commodity prices, we expect core goods PCE (Personal Consumption Expenditures) inflation to rise to around 3%. If wage stickiness continues affecting service prices, the Fed’s preferred inflation measure, core PCE, could climb from 2.8% to about 3.4% in the coming months.
Looking at US inflation expectations, while Michigan Fed survey data may be politically influenced, New York Fed survey data has already begun to rise. If the core inflation rate reaches near 3.4% in the coming one to two months, the market’s current rate-cut expectations would likely retreat, supporting the dollar index.
Figure 5: US Core Inflation Trending Upward
Figure 6: Corporate Profitability Suggests Further Commodity Inflation Growth
Next, examining the labor market, earlier revisions significantly lowered US labor data, which triggered a steep dollar decline, even prompting some aggressive analysts to suggest an impending recession. However, unemployment claims and layoff data do not show major stress. Unemployment Insurance (UI) claims remain stable; corporate layoff rates are very low; and JOLTS data indicate layoffs and discharges are far below pre-pandemic levels. These indicators reveal no substantial labor market pressure, even accounting for slower labor force growth.
In summary, under current conditions of potentially rising inflation and an overall robust labor market, aggressively betting on accelerated Fed rate cuts to push the dollar sharply lower seems too optimistic. We expect the upcoming September employment report to provide the definitive signal (noting the increasing political interference in Nonfarm Payroll figures but also corroborated by other labor data).
An important metric to watch is whether the one-year forward one-year US short-term interest rate (shown as the white line in the chart below) breaks below 3%. This is unlikely before the September labor report. If that report again disappoints substantially, it would indicate serious labor market weaknesses (suggesting economic fundamentals may be lagging), possibly causing the rate to sink below 3%. Only then would the dollar realistically break downward through the ten-year long trendline shown in Figure 1.
Therefore, the conclusion is that despite a tendency for the dollar to break below the decade-long trendline under the combined influence of Trump-era fiscal and monetary easing, this is unlikely to happen in the immediate 8-9 month window. The short-term probability of a sustained downward breakout is lower than that of a rebound. If the dollar stops falling, emerging markets and emerging assets that have benefited from the weak dollar will likely face short-term correction pressure.
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