The DXY Index appreciated by 0.4% to 97.1 after three volatile sessions. While overall sentiment toward the greenback remains negative following its 10% decline in 1H25, volatility has increased as markets become more sensitive to US labour and inflation data that shape Fed cut expectations. The passage of Trump’s One Big Beautiful Bill adds to the USD’s vulnerability by posing two threats: it links long-term US bond yields to mounting concerns over unsustainable US debt and shifts Trump’s attention toward undermining Fed Chair Jerome Powell in pursuit of aggressive Fed cuts heading into this fall.
DXY initially jumped from 96.8 to 97.4 after June’s US nonfarm payrolls increased to 147k, bucking the widespread anticipation for a decline to 106K from 144K (revised from 139K) in May. The unemployment rate also fell to 4.1% instead of the expected rise to 4.3% from 4.2% in May. The US Treasury 10Y yield surged to 4.36% from 4.26% as the futures market pulled back the odds for a July Fed cut to less than 5% from 25% a day earlier.
However, the DXY could not break above 97.4 and retreated to 96.9 over the next hour. Upon closer inspection, the better-than-expected NFP was masked by an increase in government hirings. Private sector payrolls declined to 74K in June from 137K in May, consistent with the 33K private sector jobs lost in the ADP Employment report. The ISM Services Employment Index also declined to 47.2 in June from 50.7 in May. Average weekly earnings slowed to 3.7% YoY in June, its lowest level in 11 months. Hence, the futures market maintained a two-thirds chance for a Fed cut in September.
Nonetheless, the increase in the overall ISM Services PMI to 50.8 from 49.9, driven by better new orders, was enough to lift the DXY to a higher 97.1-97.2 range for the rest of the session. However, the DXY could not break above this range despite US Treasury Secretary Scott Bessent’s rejection of this year’s USD decline as a reflection of its diminished global status, and the idea that the CNY or the EUR could replace the USD as the dominant reserve currency. The greenback could not shake off unsustainable debt worries, as House Republicans caved in to approve Trump’s One Big Beautiful Bill, which would also lift the federal debt ceiling by USD5 trillion. The US Treasury 30Y yield held firm in a higher 4.835-4.865% range after its jump from 4.79% on the stronger-than-expected nonfarm payrolls.
Trade uncertainties linger as the US enters its Independence Day long weekend. Bessent acknowledged that Japan’s Upper House elections on July 20 may constrain trade talks. European Commission President Ursula von der Leyen warned that a final EU-US trade deal was impossible before the July 9 deadline, with both sides aiming for a tentative agreement instead. Commerce Secretary Howard Lutnick announced that tariffs could increase for countries without deals. Although Bessent warned that tariffs could rise back up to April 2 levels, he added that countries negotiating in good faith could have their tariffs remain at the 10% baseline, with Washington looking to finalize more trade deals by Labor Day, which falls on September 1.
Fears of Fed independence will continue to cast a long shadow over the USD. With his OBBB clearing Congress, Trump should increase pressure on Powell for aggressive rate cuts, i.e., from 4.25-4.50% to 1%. Bessent affirmed that Trump would decide this fall on who will assume the Fed Chair after Jerome Powell’s term ends in May 2026. Appointing a shadow Fed Chair could serve as a powerful tactic to undermine the sitting chair and exert informal control over monetary policy. For example, the futures markets see the Fed lowering rates every quarter between 3Q25 and 3Q26. Markets should be wary of more DXY volatility from inflation data in the coming fortnight – the New York Fed’s inflation gauges on July 8 and the CPI data on July 15.
Quote of the Day
“To think too much is a disease.”
Fyodor Dostoyevsky
July 4 in history
In 2024, the Labour Party, led by Keir Starmer, won a landslide majority in the 2024 UK general election, ending 14 years of Conservative government.
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