Next week looks crucial for the dollar’s Fed-led recovery

The dollar index’s recovery from 2023’s double-bottom and its 2021 pandemic lows could hang in the balance with next week’s pivotal US data perhaps determining whether bearish, dwindling Fed rate hike expectations will persist.

The dollar’s recovery from March’s 100.78 banking crisis lows by February’s 100.80 lows was led by 2-year Treasury yields rebounding toward March’s 5.08% peak and highest since 2007. But the dollar has fallen from September’s 114.78 highs, despite 2-year yields making new highs in March and as yields approach those highs currently.

The Fed, by not hiking rates in June, despite indicating there could be two additional hikes, left the dollar in the lurch heading into next week’s June ISMs and employment report.

If the data fail to push 2-year yields, which encompass most Fed policy expectations, past March’s highs, the dollar’s downtrend could resume, putting in play this year’s lows. The index’s May 31 recovery high was rejected by weekly chart resistance that persists.

Next week’s data would have to drive 2-year yields to new highs to make retesting May’s 104.70 highs plausible. But as the market has demonstrated, the dollar upside from higher yields is waning, so a rally could be a chance to get short at better levels.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)