US Dollar Forecast: DXY Sinks as Weak Jobs Data Fuels Rate Cut Bets, EUR/USD Surges

Dollar Plunges as Weak Jobs Data Fuels Rate Cut Expectations

The U.S. Dollar Index (DXY) tumbled to a four-month low on Friday, dropping 0.22% to 103.905, as weaker-than-expected jobs data reinforced expectations of multiple Federal Reserve rate cuts. The euro surged to $1.0888—marking its strongest weekly gain in 16 years—while the yen strengthened, sending USD/JPY to a five-month low of 146.94 before recovering slightly.

Treasury yields also fell, with the 10-year dipping to 4.246% and the 2-year slipping to 3.932%, as traders recalibrated their Fed expectations. Futures markets now price in 78 basis points of easing this year, roughly three 25-basis-point cuts, increasing the likelihood of the first move by June.

Is the Labor Market Finally Cracking?

February’s nonfarm payrolls report showed the U.S. economy added just 151,000 jobs, missing expectations of 170,000. Unemployment ticked up to 4.1%, and government payrolls shrank by 10,000. More concerning for the Fed, wage growth slowed, with average hourly earnings rising just 0.3% in February, down from January’s 0.5%.

Markets were already positioned for rate cuts, but Friday’s data deepened concerns that the economy is slowing faster than anticipated. The softer wage growth may be a relief for the Fed, as it suggests inflationary pressures in the labor market are easing, further justifying a shift toward policy easing.

Euro Surges as Germany Abandons Fiscal Restraint

The euro took full advantage of the dollar’s weakness, climbing 4.5% on the week—its biggest rally since 2008. Germany’s decision to loosen fiscal policy and increase spending added further fuel to the rally, pushing EUR/USD to a four-month high of $1.0888. Some analysts now see the euro extending toward $1.10 if the dollar continues to struggle.

Sterling also gained, rising to $1.2945, though its upside may be limited as it enters overbought territory. Meanwhile, the Canadian dollar weakened after disappointing jobs data, with USD/CAD jumping to 1.4378 as Canada reported a mere 1,100 job gains—far below the 20,000 forecast.

Will Tariffs Deal Another Blow to the Dollar?

Uncertainty over U.S. trade policy remains a key risk for the dollar. President Trump’s temporary tariff relief for Canada and Mexico provided little support, as markets anticipate broader trade restrictions set to take effect in April. Powell reiterated that a one-time inflationary spike from tariffs may not justify a monetary response, meaning the Fed is unlikely to react until economic weakness is more pronounced.

Market Outlook: Can the Dollar Avoid a Deeper Selloff?

The dollar’s next major test will be next week’s inflation report and the upcoming Fed meeting. If inflation continues to soften, expectations for deeper rate cuts will likely build, putting further pressure on the greenback. However, any upside surprise in inflation could stall the decline, providing temporary relief for DXY.

For now, traders should watch the November 5 bottom at 103.373 closely. A break below could accelerate selling, while a bounce above the 200-day moving average at 104.993 may signal a short-term reprieve.

The main range is formed by the September 27 bottom at 100.157 and the January 13 top at 110.176. The index closed on the weakside of its 50% to 61.8% retracement zone at 105.167 to 103.984, putting it into a bearish position ahead of the weekend.

The path of least resistance, however, remains lower as Fed easing expectations gain momentum.

More Information in our Economic Calendar.