Dollar under pressure near three-and-a-half-year low

Dollar pressured by fiscal worries and dovish Fed tone

The US dollar index (DXY) hovered around 96.6 on Wednesday, lingering at its lowest level in nearly three and a half years. The currency’s decline reflects a combination of dovish Federal Reserve expectations and mounting unease over the fiscal implications of President Donald Trump’s sweeping tax-and-spending plan.

Fed Chair Jerome Powell, speaking at the ECB Forum, struck a cautious tone on future policy moves. While he reiterated the central bank’s patience, Powell did not fully rule out the possibility of a rate cut as early as this month’s meeting. However, he emphasized that recent inflationary pressures, driven in part by Trump’s tariffs, have complicated the Fed’s decision-making process. Powell acknowledged that in the absence of these tariff effects, the Fed likely would have eased by now.

Meanwhile, fiscal concerns are intensifying. The Senate narrowly approved Trump’s $3.3 trillion fiscal package overnight, with Vice President JD Vance casting the tie-breaking vote. The legislation now moves back to the House, where a close vote is expected before July 4. Should the bill pass, it would add substantially to the federal deficit—a factor already weighing on investor sentiment toward the dollar.

Markets await key jobs data as Fed patience wears thin

Investor attention now turns squarely to incoming labor market data, with the ADP private-sector employment report due later today, followed by Thursday’s critical Non-Farm Payrolls (NFP) release.

Economists expect the ADP report to show a 99,000 job gain in June. A softer print could provide ammunition for the Fed’s dovish members pushing for near-term easing. However, given the Fed’s recent messaging, it would likely take a significant downside surprise to materially shift expectations for a July rate cut.

Recent US economic data has offered mixed signals. Job openings unexpectedly rose in May, while the ISM Manufacturing Index pointed to a slower pace of contraction. Notably, price components in the ISM survey indicated rising input costs—further complicating the Fed’s inflation calculus.

For now, futures markets continue to price in just under a 50% probability of a rate cut by September, with the July FOMC meeting still seen as too soon for action barring a major labor market deterioration.

Oil steady as OPEC+ prepares for output increase

In commodity markets, Brent crude oil futures held near $67 per barrel on Wednesday, stabilizing after gains in the prior session. The market remains cautious ahead of the July 6 OPEC+ meeting, where the group is widely expected to approve an additional 411,000 barrels per day in August output increases. This would bring the cumulative 2025 production boost to 1.78 million bpd—equivalent to more than 1.5% of global oil demand.

The move is seen as a response to chronic overproduction by some members and an effort by Saudi Arabia to recapture market share lost to US shale and other competitors.

Adding to the cautious mood, the American Petroleum Institute (API) reported a surprise build in US crude inventories, with stockpiles rising 680,000 barrels last week, defying consensus expectations for a drawdown of over 2 million barrels.

Trade tensions remain in focus as July 9 tariff deadline nears

Beyond the Fed and labor market data, trade policy developments are also shaping market sentiment. Trump’s 90-day global tariff pause is set to expire in just eight days. Absent a series of bilateral trade deals, the White House could reimpose country-specific reciprocal tariffs, including 50% levies on EU imports, 30% on Chinese goods, and a 10% baseline global tariff.

Japan faces heightened risk of new US tariffs, particularly over its reluctance to increase US rice imports. Meanwhile, the EU appears more willing to accept a 10% tariff cap in exchange for broader exemptions—though final negotiations remain ongoing.

The currency markets are reflecting these risks. The dollar remains the weakest G10 performer this week, followed by the Canadian dollar and the yen. Sterling is leading the pack, supported by resilient UK data, while the euro and the Aussie dollar trade near the middle of the pack.