Dollar steadies after Powell's dovish pivot as markets price 85% odds of September rate cut

The dollar found its footing on Monday after a brutal week of selling, as traders recalibrated their positions in the wake of Jerome Powell's dovish turn at Jackson Hole. Last week, Powell's openness to cutting rates in September had shocked markets that had braced for caution. The greenback tumbled nearly 2% in days, dragged down by a sudden rush into riskier assets. By Monday, the currency had steadied, though the rebound looked less like a recovery and more like traders taking profits after the sharp move.

The euro, which had climbed to a four-week high, slipped back 0.2% to around $1.169. Sterling and the Swiss franc eased slightly as well. The dollar's bounce was not a signal that sentiment had shifted—it was mechanical repositioning. Beneath the surface, the narrative that had sent the greenback lower remained intact: the Federal Reserve was preparing to ease monetary policy, and that meant lower returns on dollar-denominated assets.

Treasury yields, which had fallen sharply after Powell's speech, stabilized on Monday around 3.95%. This matters because U.S. Treasury yields are the primary anchor for dollar demand. When yields fall, foreign investors have less reason to hold dollars. The narrowing gap between American yields and those overseas—particularly in Europe and Japan—had been a key driver of the dollar's weakness. The modest stabilization in yields suggested traders were not yet convinced that the rate-cut narrative would reverse, but neither were they rushing to bet heavily on further declines.

Markets were pricing an 85% probability of a rate cut in September, up sharply from 70% before Powell's remarks. This shift reflected a broad conviction that the Fed was ready to move away from its "higher for longer" stance. The reasoning was straightforward: U.S. growth was cooling, inflation progress had stalled, and political pressure ahead of November's elections was mounting. A rate cut could ease financial conditions without signaling panic—a balance Powell appeared intent on striking.

The dollar had fallen steeply this year, posting one of its worst annual performances in recent memory. The euro had gained nearly 13% against the greenback over the same period, with strategists eyeing $1.20 to $1.22 as the next target if U.S. monetary easing accelerated. For global investors, a weaker dollar had real consequences: it lowered borrowing costs in emerging markets, lifted commodities priced in dollars like gold and oil, and reshuffled capital flows across the world. American companies reliant on imports faced tighter margins, while those exporting goods benefited from lower prices abroad.

The path forward hinged on two data releases: the August payrolls report and the PCE deflator, the Fed's preferred inflation measure. Strong jobs or inflation numbers could soften expectations for aggressive easing and give the dollar another leg up. Weak data would reinforce Powell's dovish lean and send the greenback sliding again. Strategists noted that structural factors—wide U.S. fiscal deficits, political uncertainty, and accelerating global diversification away from dollar assets—pointed to continued weakness over the next six to twelve months. Yet the Fed had not locked itself in. Any surprise rebound in wages or core inflation could quickly reignite dollar strength.

Monday's stabilization showed the dollar was not in free-fall, but neither was it on firm recovery ground. The greenback's trajectory now depended on whether incoming data would validate Powell's dovish pivot or force the Fed to reconsider. For now, the balance of risks still pointed to further weakness, but the rebound potential remained very much alive if U.S. data surprised to the upside. The era of a relentlessly strong dollar was fading. The question traders were wrestling with was not whether the dollar would weaken further, but how fast and how far it would fall.