The Dollar Is Sliding — And Markets Are Starting to Rethink the Fed

The US Dollar is having a rough start to the week.

The Dollar Index has fallen to a two-month low, while EUR/USD has pushed above 1.1600 and AUD/USD is trading above 0.7120.

The main pressure point is the Fed.

US data have given traders less reason to expect another rate hike, and the market has moved quickly to price that in. September hike bets have fallen to around 30%, down sharply from more than 50% a week ago.

That repricing is showing up across the market. Gold is catching a bid, Treasury yields are coming under pressure, and the dollar is losing ground against most major currencies.

EUR/USD is now sitting around levels that ING considers close to its short-term fair value of 1.1600–1.1650. After the latest move, holding above 1.1600 may be more important than simply pushing higher.

The Aussie has been stronger too. AUD/USD is above 0.7120, helped by the RBA's hawkish stance and stronger demand for commodities.

Then there is the longer-term dollar story.

US government debt is approaching $40 trillion, while the cost of servicing that debt continues to rise. Bank of America strategist Michael Hartnett expects the dollar to remain under depreciation pressure over the longer term.

If incoming US data continue to weaken the case for another hike, the dollar could remain on the back foot. But after such a sharp repricing in just one week, the next move may depend heavily on what the next batch of US data says.