The U.S. dollar is staging a modest rebound ahead of Friday’s August nonfarm payrolls report, with the U.S. Dollar Index (DXY) trading near 99.08 and gaining about 0.18%. The move comes after a sharp decline Thursday as Federal Reserve Governor Christopher Waller pushed back against expectations for an imminent rate hike.
The dollar’s rebound suggests traders are reluctant to extend the selloff ahead of a potentially market-moving employment report. But the broader policy debate has shifted, with inflation emerging as the more important test for the Fed’s September decision.
Against the major counterparts, here’s how the dollar is trading:
Dollar Vs Major Counterparts
| Currency Pair | Move |
|---|---|
| EUR/USD | -0.04% |
| JPY/USD | -0.31% |
| GBP/USD | +0.05% |
| CAD/USD | -0.09% |
| AUD/USD | little changed |
| CHF/USD | -0.28% |
Dollar Recovers After Waller Shock
The dollar came under pressure Thursday after Waller said he is inclined to support leaving rates unchanged at the Fed’s Sept. 15-16 meeting if inflation continues to cool.
His comments reduced the market’s conviction around a September hike, particularly after Fed Chair Kevin Warsh’s recent hawkish stance had pushed rate-hike expectations higher.
DXY is now recovering modestly, but the move looks more like a stabilization ahead of NFP than a decisive reversal. The index remains close to the 99 level, leaving traders watching whether Friday’s data can provide enough evidence to shift Fed expectations again.
NFP Still Matters but Inflation May Matter More
The August employment report is the immediate catalyst, but Waller’s comments complicate the traditional NFP-dollar relationship.
A stronger-than-expected payrolls report could lift Treasury yields and revive expectations for tighter Fed policy, supporting the dollar. A weak report could reinforce expectations that the Fed will leave rates unchanged and put renewed pressure on DXY.
But Waller has effectively signaled that the labor market may not be the decisive variable. He described employment conditions as relatively stable and emphasized the importance of the incoming inflation data. That means even a solid payrolls number may have a limited impact if wage growth remains contained and inflation continues to moderate.
The Inflation Test Comes Next
The bigger policy catalyst arrives with the August CPI report on Sept. 11, just days before the Fed meeting.
Waller said three-month core inflation has fallen steadily from earlier in the year, although it remains above the Fed’s 2% target. He argued that the continued downward trend provides a reason to give disinflation more time to work.
That creates a two-stage test for the dollar.
Friday’s NFP report will shape expectations around labor-market strength, while next week’s inflation data could determine whether those expectations translate into a meaningful repricing of the Fed’s policy path.
Dollar Faces Two-Way Risk
For dollar bulls, the cleanest setup would be a strong payrolls report accompanied by firm wage growth. That combination could push yields higher and restore expectations for a September hike.
For dollar bears, a weak jobs report followed by softer inflation would be a much stronger combination. It would reinforce Waller’s case for patience and potentially extend the dollar’s broader decline.
The immediate price action, however, suggests traders are waiting for confirmation. DXY’s move back above 99 ahead of NFP shows the dollar has found some footing, but the next major move is likely to depend on whether the data strengthen or weaken the case for tighter Fed policy.
The key question is no longer simply whether NFP beats expectations. It is whether the data alter the Fed’s inflation-versus-growth trade-off, and ultimately the path of rates.
NFP Scenario Analysis for DXY
| NFP outcome | Labor Market Signal | Fed Rate Expectations | Dollar Reaction |
|---|---|---|---|
| Strong Beat | Payrolls materially above expectations; unemployment stable/lower; wages firm | Hawkish repricing; September hike odds rise | Strengthens |
| Moderate Beat | Jobs beat modestly; wages remain contained | Limited change; hike expectations may edge higher | Mildly higher |
| In-line | Payrolls around expectations; unemployment and wages broadly stable | 50/50 Fed outlook persists | Rangebound |
| Soft miss | Weak hiring; unemployment rises; wage growth cools | September hold favored | Pulls back |
| Major downside | Payroll contraction or sharp unemployment increase; wages weaken | Strong dovish repricing | Sharply retreats |
| Strong jobs+ hot wages | Payrolls beat and wage growth accelerates | Most hawkish outcome; hike odds jump | Strengthens |
| Weak jobs+ stickywages | Hiring deteriorates but wage inflation remains firm | Fed dilemma; hike/hold uncertainty | Choppy |
MarketFramework's Top Traded Contracts tool shows that the 6E Forex futures client base has swung back to Strong Long, with a 100% long lean. The crowd split shows a 100% of winners were long and 100% of losers were short. But the week overall is still net negative, down roughly $4.8K, suggesting Friday's gain only partially offsets losses taken while the crowd was positioned the other way.
