Dollar holds advance ahead of key data

The dollar index hovered above 97.8 on Thursday, steadying after a sharp rebound in the prior session as traders awaited key labor and inflation data that could shape the Federal Reserve’s policy trajectory.

Weekly jobless claims, due later today, will be closely watched amid mounting concerns over labor market weakness and rising corporate layoffs. Friday’s release of the Personal Consumption Expenditures (PCE) price index—the Fed’s preferred inflation gauge—will provide additional insight into how tariffs are feeding into price pressures and whether disinflationary momentum is at risk of stalling.

Recent commentary from Fed officials has further complicated the policy picture. Chair Jerome Powell emphasized the need to balance persistent inflation with softening employment conditions, but stopped short of endorsing aggressive easing.

Meanwhile, some policymakers have argued for patience, while others signaled readiness to accelerate cuts if the labor market deteriorates further. As a result, markets have scaled back expectations for imminent easing: futures are no longer fully pricing in a cut at the Fed’s next meeting, instead implying around 43 basis points of total reductions across the two remaining meetings this year.

Adding another layer of risk, uncertainty over a potential US government shutdown has unsettled investors, raising concerns about fiscal dysfunction and possible disruptions to data releases or public services. While markets have historically looked past short-lived shutdowns, the political backdrop has added to an already fragile risk environment.

The dollar’s resilience reflects a cautious recalibration in expectations. Traders are wary of overstating the Fed’s dovishness, particularly with inflation still running above target and core readings sticky. Against this backdrop, the greenback has found support versus major peers, with recent gains most pronounced against the euro and sterling. However, safe-haven demand for the yen and Swiss franc has capped the dollar’s upside.

The near-term trajectory will hinge on upcoming data. A stronger-than-expected PCE print could reignite fears that tariffs are embedding inflationary pressures, limiting scope for aggressive easing, while weak jobless claims data would bolster bets on deeper cuts. Until then, currency markets are likely to remain choppy, with political risks and Fed communications adding to volatility.