Despite challenges, the US dollar’s value remains steady. Soft NFP reports and dovish Federal Reserve moves have led traders to predict easing, with a 70 bps reduction expected by year-end and an 8% chance of a 50 bps cut in September.
Despite expectations, the US dollar has not reached new lows, maintaining a range since June. The market may have reached its weakest point for the dollar. Similarities to September 2024 are being drawn, where a soft NFP and an “insurance cut” were observed, influenced by reports from Nick Timiraos.
Difference From Past Trends
A key difference from past trends is that previous rate cuts were amid falling inflation, while the anticipated cuts in September 2025 occur amidst rising inflation. If the economy improves post-rate cuts, a hawkish shift might support the dollar.
Business surveys have been positive, though issues persist in the labour market, attributed to uncertainties from previous Trump policies. As these uncertainties resolve, the year’s final quarter will reveal if the economy is recovering or if underlying issues are worse than expected.
Despite the Non-Farm Payrolls report from September 5th, 2025, showing a weak gain of only 145,000 jobs, the US dollar is not collapsing. This resilience suggests that the market may have already priced in maximum pessimism on the currency. Traders should therefore be cautious about adding to short dollar positions.
We are seeing strong similarities to the playbook from September 2024, when a surprise 50 basis point “insurance cut” was followed by a strong dollar rally. The Dollar Index (DXY) climbed over 4% in the two months following that 2024 cut as the economy proved more resilient than feared. This history suggests a rate cut now might not automatically lead to a weaker dollar.
Potential Surprise Strategy
The crucial difference this time is that the Federal Reserve would be cutting rates into rising inflation, with the last CPI report showing core inflation at 3.8%. A year ago, they were cutting into a falling inflation environment, which gave them more flexibility. This situation may force the Fed to quickly turn hawkish if the economy accelerates after a cut, providing support for the dollar.
Given this uncertainty, we believe traders should consider using options to position for a potential surprise. Buying call options on the dollar or dollar-based assets offers a low-risk way to profit from a hawkish repricing, similar to what we saw in late 2024. Volatility strategies, like straddles, could also be effective around the upcoming FOMC meeting announcement.
Business surveys like the recent ISM reports have remained positive, suggesting the economy’s foundation is stronger than the frozen labor market implies. We see the next few months as a crucial period that will reveal if the slowdown was a temporary shock or a more fundamental problem. This means staying nimble and being prepared for the dollar to strengthen if economic data outside of employment picks up steam.
